The spring homebuying season has arrived - and with it a fresh new crop of mortgage products.

Yes, tried-and-true offerings such as 30-year fixed-rate loans and one- year adjustables still dominate the mortgage scene. But to stand out from the crowd and attract borrowers when interest rates are well above recent lows, lenders are trotting out an array of alternatives.

"There's all kinds of crazy stuff out there," said Larry Swedroe, managing director at Residential Services Corp. of America, Clayton, Mo.

Such as?

"Step loans, buy-downs, 5-4-3-2-1, or a 7% increase in payments each year."

Consumers aren't quite sure what to make of it all.

"If lenders create more programs to get people into homes, we encourage that," said Jordan Clark, president of United Homeowners' Association, Washington. But, he added, "how well the consumer understands the programs is another question."

For example, a homebuilder may pay a fee up front to reduce the interest rate as an incentive for the homebuyer in a buydown loan. The 5-4-3-2-1 loan Mr. Swedroe referred to is a version of a step loan, which artificially manipulates the portions of the monthly payment attributed to principal and interest.

Do such complexities attract customers when even a 30-year fixed-rate loan application and closing can be intimidating to the first-time homebuyer?

Lenders insist there's enough demand for offbeat mortgages to justify the proliferation of new products.

One of the largest lenders, Countrywide Home Loans of Pasadena, Calif., offers 88 different loan products, said Tom Halley, executive vice president.

Though only about 10 of these products are widely used, the remainder occupy important niches, he maintained. "To be all things to all people, we have to offer products from low-income and jumbo loans to typical vanilla products to 90% loan-to-value."

Right now, one of Countrywide's more popular niche offerings is the Reduced Rate Option Mortgage. The 30-year loan carries a lower-than-average fixed rate, but levies a penalty for prepayments. It appeals to borrowers who think interest rates won't go any lower, Mr. Halley said.

Most borrowers, of course, don't feel equipped to speculate on matters such as the direction of interest rates. But some sophisticated customers do, and this group is driving lenders to develop products that will fit their needs, said Mark Zandi, chief economist at Regional Financial Associates, West Chester, Pa.

"Now that some customers are used to it, they are investigating more what might fit their needs," Mr. Zandi said. "Over time, borrowers will appreciate the choices they have and will get used to it."

Then, of course, there are the lenders themselves. Mr. Zandi says they are scrambling to make money on a product that has become a commodity. One way to fatten profits is to come up with a mortgage with a twist - so that's what lenders are doing.

Some are quick to admit that most of the new loans are little more than variations on a theme.

"Virtually every kind of loan that can be invented has been invented," said Sam Lyons, executive vice president at Great Western Bank, Chatsworth, Calif.

Even so, Great Western currently offers 15 different loans. "We have to do that or we are not getting enough of a cross market."

Some lenders are wooing customers by throwing in goodies along with a mortgage. North American Mortgage, for instance, offers a preapproved credit card with a loan, said a spokesman for the Santa Rosa, Calif., company. The lender also offers a preapproved home equity line of credit with first mortgages, an increasingly popular gimmick.

Other lenders are borrowing ideas from abroad. Wendover Funding, Greensboro, N.C., one of the largest subservicers - it services loans but does not own the servicing rights - has seen a mortgage combined with a life insurance policy, known as an "endowment loan."

The interest-only loans have long been popular in England and Canada, but they're just catching on in the United States, said Michael Hyman, senior vice president at Wendover.

Borrowers build up cash value in the insurance policy, Mr. Hyman said, allowing them to pay off the principal of the loan in a lump sum after 30 years.

"One of the advantages is borrowers can deduct the interest payment (from their Federal income tax) on the entire balance, and they get a tax- deferred buildup with the insurance policy," Mr. Hyman said.

Wendover subservices about 25 of these loans for one lender, Mr. Hyman said.

Step loans also are making something of a comeback. These loans, which help borrowers qualify and keep monthly payments as low as possible, were last popular in 1990 and 1991, when 30-year mortgage interest rates were around 10%, said Mr. Swedroe of Residential Services Corp. If rates creep past their current level of around 7.77%, step loans could really take off.

These tricky loans have definite drawbacks. They are harder to service, almost impossible to sell on the secondary market, carry added risk and have questionable benefits for the borrowers. But if they help build volume, lenders think the effort is worthwhile.

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