I have recently been discussing refinancing my house (since home prices have risen 100k in the last year) and Equity Direct offered a loan that I don’t fully understand. I guess each month, I’m given a choice whether to make a payment based on an adjustable rate (about 2%), on a fixed rate (about 4%), or an interest only. Can someone please explain this loan better to me and give me information about their experiences with it?
There are a number of variable interest loans (ARMS) that offer a choice of payments each month. You can make a minimum payment, which pays no principal and only part of the interest; you can make an interest only payment, which pays only the interest for that month; you can make a fully amortized 15 year or year level payment, which pays down both principal and interest. The interest rates on these loans is tied to a variable rate (The Monthly Treasury Average or MTA, or a LIBOR rate which is an overnight rate in London) that changes periodically. These are very good loans for people who need some flexibility in payment schedules or need a low payment for a period of time. The interest rates are usually pretty low and there are a lot of variations in the way the ARMS change rates. Talk to a good loan officer and he/she can spell it out pretty clearly.
As an Escrow Officer, I haven’t seen too many of these yet. I have also heard them referred to as “pick-a-payment” loans. I have seen a few lenders start to offer them as an option recently (like, within the past year).
Basically, it’s as you said: each month, you get to decide which payment you wish to make, based on one of the calculation methods you mentioned (adjustable, fixed, or interest only). And you can choose a different one every month if you like.
The supposed benefit to you is that you have flexibility to select what works best for you at the moment (an interest only payment would be lower, and maybe you had a bad financial month, for instance).
One thing I would look into if I were to consider one of these programs is what will happen if you for some reason keep the loan for it’s entire term and it’s time to pay it off… when you constantly change the way you are paying, you change the rate at which you pay off the principal of your loan (amortization).
Although most people will either sell the property or refinance before the end of the life of the loan, if for some reason you didn’t it is possible that you could have a large payment due at the end of the term that you didn’t expect.
I would say your best bet is to ask questions, and if possible get a copy of the note you would be asked to sign and read it over (so you can ask more questions 
)
Hope that at least gives you a start!
This is a great website for general mortgage info, including historical performance information for the various Indices that ARM mortgages are based on: