Interest Rate

• The interest rates on fixed mortgages are based on 10-year Treasury bill rates. The federal government borrows money from investors by issuing 10-year bills. Because mortgages are debt instruments and most are paid off within 10 years, investors view mortgages and 10-year bills as being similar. Lenders price mortgages so that rates are higher than Treasury bills and likely to entice investors. Rates move up and down with Treasury rates. Lines of credit have variable rates based on the lender's prime rate. The prime rate reflects the cost of lending for borrowers with good credit. The rate rises or falls whenever the cost of lending banks must pay to borrow money from the Federal Reserve changes.
  
  

Term

• Standard fixed mortgages typically have terms lasting 15 or 30 years, although some lenders offer 10-year and 20-year fixed mortgages. Lines of credit normally last for between 15 and 30 years, but lenders break that term time down into two distinct sections. During the first 10 or 20 years, the borrower can use the line as a revolving form of credit. After the initial term ends, the borrower must pay back proceeds and can no longer use the revolving credit facility.
  
  

Monthly Payments

• Mortgages and lines of credit both require the borrower to make monthly payments. However, fixed mortgage payments include principal and interest, and the loan amortizes over the term of the loan. Amortization involves the lender calculating the total cost of principal and interest and dividing that total cost into equal payments that last for the entire term of the loan. People with lines of credit normally only have to make monthly interest payments. When the revolving term ends, the borrowers make principal and interest payments.
  
  

Closing Costs

• Fixed mortgages usually are sold to investors and require more thorough underwriting than lines of credit, which lenders normally do not sell. Borrowers with less than 20 percent equity must buy mortgage premium insurance for fixed mortgages, but lenders do not require it for equity lines. Additionally, property surveys and full appraisals, which combined can cost upwards of $700, are required for fixed mortgages but not for all lines of credit. Lenders often use tax appraisal values or electronic values to calculate home prices for lines of credit.