Loan Schemes

Predictable monthly payments

A fixed-rate mortgage offers a straightforward, predictable monthly payment. With fixed-rate mortgages, your interest rate—and your total monthly payment of Glossary Term:principal layer and Glossary Term:interest layer—will stay the same for the entire Glossary Term:term layer of the loan. That predictability makes it easier to set your budget.

Advantages of a fixed-rate mortgage

Fixed-rate mortgages are a good choice if you:

• Think interest rates could rise in the next few years and want to keep the current rate
• Plan to stay in your home for many years
• Prefer the stability of a fixed principal/interest payment to a payment that changes periodically (which is what happens with an adjustable-rate mortgage)

How term affects interest and equity

In general, the longer the term of the fixed-rate mortgage is the more interest you will pay over the life of the loan and the higher your interest rate will be, but your monthly payments will tend to be lower. The shorter the repayment term is, the lower the interest rate will be and the faster you’ll pay off and build Glossary Term:equity layer in your home, though your monthly payments will generally be higher.

Fixed-rate mortgage loans are available in a variety of repayment terms, with 30-, 20- and 15-year fixed-rate mortgages being the most popular.

30-year fixed-rate mortgage

The 30-year fixed-rate mortgage is one of the most popular mortgages. Many people like the fixed interest rate and lower monthly payments. But since the term of the loan is long, you’ll pay more interest over the life of the loan than you would on a shorter-term mortgage, and you’ll build equity more slowly.

20-year fixed-rate mortgage

A 20-year fixed-rate mortgage helps you pay off your home faster and build equity more quickly than longer-term fixed-rate mortgages. A 20-year fixed-rate mortgage generally has a lower interest rate than longer-term home loans but higher monthly payments.

15-year fixed-rate mortgage

You generally pay a lower interest rate with a 15-year fixed-rate mortgage than you would for longer-term fixed-rate mortgage loans. You will pay less interest than you would with a longer-term loan and build equity more quickly. However, your monthly payments will be higher for a 15-year fixed-rate mortgage than they would be on a longer-term mortgage.

Fixed-rate interest-only loans

Note: Bank of America offers the interest-only payment option on jumbo loans only.

Fixed-rate interest-only loans have a 30-year term and an initial time frame, usually 10 years, during which you can choose to make interest-only payments or both principal and interest payments. This means the initial payments are comparatively low, allowing you to use the balance of your cash flow for other immediate needs. At the end of the interest-only period, you will be required to pay both interest and principal so the outstanding balance will be paid in full over the remaining 20-year term of the loan.

While you’re paying only interest, your payments are not building potential home equity. By the end of the interest-only period you will still owe the original amount you borrowed, which may make it more difficult to refinance your mortgage or to make money from selling your home. If you paid only interest during the initial time frame, once the initial time frame expires your payments will be significantly higher and can result in “payment shock.” Be sure you fully understand the risks involved before committing to an interest-only loan and making interest-only monthly payments. Since this loan begins with an interest-only period, you will pay more interest over the life of the loan compared with a traditional 30-year mortgage.

Interest-only loans tend to appeal to people whose income fluctuates (those who are self-employed, on commission or on a bonus schedule) or who expect to own their home for a short period of time.

Jumbo loans

If your mortgage will be for an amount higher than Glossary Term:conforming layer thresholds, a jumbo mortgage may be an option. Jumbo loans are available for primary residences, second or vacation homes and investment properties, and are also available in a variety of terms. Jumbo home loans typically have a higher interest rate than smaller home loans due to different Glossary Term:underwriting layer and home equity requirements.

Combination loans

A combination loan pairs a conforming first mortgage with a home equity Glossary Term:second mortgage layer for up to 80% of the property’s value in a single application with 1 down payment. Combination loans may help you avoid the higher rates of a jumbo first mortgage. Combination loans are made up of 3 parts:

• First mortgage
• Second
• mortgage (home equity loan)
• Down payment

These 3 parts can be combined in different ways. For example, a 70% first mortgage, 10% home equity second mortgage and 20% down payment. Talk with a Bank of America mortgage loan officer for information about combination loans.

What happens at Closing?

When you purchase a new home, closing day can be a whirlwind. Everything moves fast and there are a lot of papers to sign. It’s a good idea to review what will happen ahead of time, so you can feel prepared and close your loan with confidence.

Who will be there?

The number of people who will attend your closing depends on many factors, including the state where the property is located, the property type, and more. At the closing, in addition to you, the people attending may include:

• your attorney (if you have one)
• the seller(s) or the builder's representative (if you've bought a brand new home)
• the seller’s attorney (if they have one)
• both real estate professionals (yours and the seller’s)
• a lender's representative or your Glossary Term:title company layer (in some cases)
• the closing agent (which could be a representative from the title company or a real estate attorney)
• a notary public

What happens at closing?

• The closing can be held at the title company’s office, your lender’s office, a real estate attorney’s office, or other agreed upon location, depending on the circumstances.  Here’s a review of what will happen at closing: you’ll review and sign all of your loan documents. Make sure that each document is explained clearly and that you understand the Glossary Term:term layer to which you are agreeing. If something is different than what you expected or agreed to, don’t sign until the issue is resolved to your satisfaction.
• You’ll provide evidence of required homeowners insurance and inspections (if applicable)
• You’ll give a certified or cashier’s check to cover your down payment (if applicable) closing costs, prepaid interest, taxes and insurance.
• Your lender will distribute the funds covering your home loan amount to the closing agent.
• Depending on your loan terms, you may also be required to set up a new escrow (or impound) account with your lender, so you can pay your property taxes and homeowners insurance along with your monthly mortgage payment.

What are you signing?

HUD-1 Settlement Statement: The itemized list of the final credits and charges, for both you and the seller, based on the terms of the contract. You should receive a copy of the HUD-1 at least one day prior to the closing for your review.

Homeowner tip:

Deed of trust or mortgage: The documents in which you agree to a Glossary Term:lien layer on your property, as security for repayment of your home loan.

The promissory note: The mortgage (or Glossary Term:promissory note layer) is a legal “IOU” that represents your promise to pay the lender according to the agreed terms, including the dates on which you must make your mortgage payments and where they must be sent.

Clarity Commitment^® document^Footnote1: As a Bank of America customer, in most cases you will have the advantage of reviewing this one-page summary, written in plain language, highlighting key terms of your loan.

Estimating closing costs

You will also pay Glossary Term:closing costs layer when you sign your final mortgage loan documents. Typically, you can expect to pay about 3% of the total loan amount in closing costs, although that number will depend on the state you are purchasing in and the type of loan you choose.

Understanding the closing costs

There are many elements that may go into your total closing costs, including: discount Glossary Term:points layer, recording fees, Glossary Term:origination fees layer, appraisal, notary fees, attorney fees, Glossary Term:title insurance layer, and more, depending on your loan program and where you live. Ask your lender to give you an overview of all the fees in your mortgage and to explain any you don’t understand.

Prior to closing your loan, you’ll receive your final HUD-1 Settlement Statement listing your final closing costs. Many of these costs you’ll know ahead of time, as they were listed in your GFE.

Once you’ve determined your closing costs, be sure to bring a certified or cashier’s check for the amount of your closing costs. You’ll need to provide those funds at closing. Typically personal checks aren’t accepted, so make sure to check with your closing agent about which form of payment is acceptable.

Homeowner tip:

Closing on a home is exciting—whether it’s your first or your tenth. With the right amount of preparation, you’ll enjoy the experience even more.

The Home Appraisal Process

If you're buying a home and your offer has been accepted, the next step is applying for your mortgage. As part of that process your lender will order a home Glossary Term:appraisal layer, which gives you a trained professional’s point of view on the Glossary Term:fair market value layer of the home to make sure the home’s value supports the purchase price.

Who orders the appraisal?

What happens at the appraisal?

For a home purchase, an on-site appraisal is needed for the mortgage to be approved. Appraisers consider:

• Glossary Term:Comparable layer properties that have sold recently, similar in size and location to the home you are buying; their sale prices are usually the most important factor
• General condition and age of the home
• Location of the home, including views or other remarkable features
• Size and features (for example, the number of bedrooms and baths) of the home and property
• Major structural improvements such as additions and remodeled rooms
• Features and Glossary Term:amenities layer such as swimming pools and wood flooring

What’s the difference between an appraisal and an inspection?

An inspector would be hired by you directly if you are purchasing a home and want an itemized report of potential repairs or problems with the home. On the other hand, the appraiser is hired by your lender to determine the home’s fair market value. This will allow your lender to ensure that the home loan amount is in line with what the home is really worth.

Finding the right home and the right mortgage helps set a solid foundation for successful homeownership. We have the mortgage tools, information and expertise to help you with the decisions you need to make along the way. Once you have found a home (and the seller has accepted your offer) that fits your personal preferences, your needs and your budget, it’s time to apply for your loan. If you have already selected your lender, get in touch with them and they can take your application. You can apply for a mortgage by filling out an application in person, and depending on your lender, may be able to start over the phone, or online. You’ll fill out an application, providing information on behalf of yourself and anyone else who is going to be listed as a Glossary Term: co-borrower layer on the mortgage (like a spouse or partner). If you’ve already been Glossary Term: preapproved layer, you may have filled out some of the application details by this point. What you’ll need To apply for a home mortgage, you’ll need to provide your lender with documentation to help verify your employment history, creditworthiness, and overall financial situation. If you are applying with someone else (called a co-borrower, such as your spouse), they will also need to provide the same documents.

Be prepared to provide the following: W-2s (for the last 2 years) Recent pay stubs (two most recent consecutive) Bank statements for all financial accounts, including investments (for the last 2 months, all pages) Signed personal and business tax returns (all pages and relevant schedules) If self-employed, a copy of most recent quarterly or year-to-date profit/loss statement A copy of the signed Purchase and Sales Agreement Your lender may require more documents, depending on your circumstances and the type of mortgage for which you’re applying. You can expect your lender to ask you details about your employment and financial history. With your permission, your lender will also run your Glossary Term: credit report layer as part of the process. Because a mortgage is such an important financial commitment, be sure to take your time and carefully fill out the application as completely and accurately as possible. Not disclosing credit problems up-front or holding back requested documents will only delay the process and potentially prevent approval of the mortgage, so it’s to your benefit to fully disclose everything about your finances. Locking in your interest rate Since Glossary Term: interest rates layer fluctuate frequently, things can change between the day you apply for your loan and the day you close. If you want to protect yourself against rising interest rates and ensure that the Glossary Term: loan terms layer you used to build your budget are locked, you might consider Glossary Term: locking in layer your rate with your lender when you fill out your loan application. A rate lock, also known as a “rate commitment,” is your lender’s assurance that the interest rate and Glossary Term: discount points layer are guaranteed until the rate lock expiration date. The lender will provide the terms of the rate lock to you in writing, including the agreed-upon interest rate, the length of the lock, and any discount points you choose to pay. Of course, if you believe that interest rates will decrease in the near future, waiting to lock your rate may make sense to you. In the end, it’s a personal choice when to lock your rate. The rate must be locked prior to the lender preparing your closing documents. Talk to your lender about the choice that best suits your needs and your preferences.

Mortgage glossary: Key mortgage terms and their definitions

– A mortgage loan which allows the lender to adjust the interest rate periodically in accordance with a stated index and as agreed to at the inception of the loan by all parties (also known as variable rate mortgages).

Amortization

– Repayment of a mortgage loan with periodic payments of principal and interest. The payments are calculated so that the debt is paid off at the end of a fixed period.

Annual Percentage Rate (APR)

– A numerical figure which expresses (on an annual basis) the charges imposed on the borrower to obtain a mortgage loan (such as interest, discount points and other costs).

Appraisal

– A report prepared by a qualified real estate appraiser which creates an estimate of the fair market value of a property.

Balloon Mortgage

– A short-term mortgage with fixed installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum at the end of the term.

Buydown Mortgage

– A fixed-rate mortgage with a below-market interest rate for a stated initial period. The lender receives a subsidy paid at closing from the builder, seller or buyer.

Caps

– Percentage restrictions on an ARM that limit the amount the interest rate may change per year and over the life of the loan.

Cash Reserve

– In the mortgage commitment, some lenders require that the borrower have on deposit in their bank accounts at the time of the closing an amount equal to a predetermined number of months of the cost of principal, interest, taxes and insurance. This is called a cash reserve.

Certificate of Occupancy

– A certificate issued by a local governmental entity responsible for the use of land in the community where the property is located stating that the structures on the property or any improvements made to those structures comply with the codes, ordinances and regulations of that governmental entity and that they may be occupied.

Closing

– The final step in the mortgage loan process after loan commitment. The closing is a meeting between all parties involved in the mortgage transaction in which mortgage documents are signed (also known as a settlement).

Closing Costs

– Fees paid at a mortgage closing. Some examples of closing costs are title insurance, attorney fees, recording fees and taxes.

Collateral

– Property pledged as security for repayment of a mortgage loan.

Commitment Fee

– A fee paid to the lender for originating the mortgage. When this fee is a percentage of the amount of the mortgage it is also called points. One point is one percent of the amount of the mortgage (also known as origination fee).

Commitment Letter

– A written offer by the lender to the applicant which states the terms under which the lender agrees to make a mortgage loan.

Conforming Loan

– A mortgage in which the loan amount is less than or equal to the maximum amount eligible for purchase by either Government Sponsored Enterprise (GSE – Fannie Mae or Freddie Mac). Loan amounts are considered conforming if they are less than or equal to the following amounts based on the applicable property type (Note: These amounts may change from time to time):

• 1 Family – $417,000
• 2 Family – $553,850
• 3 Family – $645,300
• 4 Family – $801,950

Credit Score

– A numerical rating provided on a credit report that indicates likelihood to repay debts based upon a person's past credit/payment history and his or her current credit standing.

Debt-to-Income Ratio

– Relationship of a borrower's monthly payment obligation on long-term debts divided by gross monthly income, expressed as a percentage (also known as bottom ratio).

Discount Points

– A one-time charge paid by the borrower to the lender at closing to obtain a lower interest rate on the mortgage loan. One point equals 1% of the loan amount; therefore, two points on a $100,000 mortgage would equal $2,000.

Equity

– The amount by which the value of the borrower's home exceeds the amount owed on the mortgage loan. If the borrower's home is worth $100,000 and the borrower owes $65,000 on the mortgage loan secured by the borrower's home, then the borrower's equity in that home is $35,000 or 35% equity in the home.

Escrow Account

– An account established with a mortgage lender comprised of funds from a borrower used to pay taxes and insurance premiums when they become due (also known as impounds).

Federal Housing Administration (FHA)

– A federal agency that is part of the U.S. Department of Housing and Urban Development (HUD) that sets policy for mortgage underwriting and provides insurance for residential mortgages.

First Mortgage

– A mortgage whose lien is superior to the lien of any other mortgage on the same property. This lien is superior either because it was recorded prior to all other mortgages, or because the lender of another mortgage, which had been recorded ahead of this mortgage has agreed to have a lien subordinated to the lien of this mortgage.

Good Faith Estimate

– An estimate of the fees a borrower will be required to pay for a mortgage. Federal law requires that the lender provide the Good Faith Estimate within three business days of the initial loan application.

Housing expense ratio

– The relationship of a borrower's monthly payment obligation on housing (principal, interest, taxes, insurances and other applicable housing expenses) divided by monthly income, expressed as a percentage (also known as top ratio).

Index

– A benchmark, usually a published interest rate, such as the U.S. Prime Rate or the one-year London Interbank Offered Rate (LIBOR) security yields, used to calculate the interest rate of an adjustable rate mortgage when the rate is scheduled to change. Generally, a margin stated in loan documents is added to the index to determine the new interest rate.

Interim Interest

– Interest owed by the borrower to the lender on the mortgage loan from the day of the closing to the date of the first payment.

Jumbo Loan

– A mortgage in which the loan amount exceeds the maximum amount eligible for purchase by either Government Sponsored Enterprise (GSE – Fannie Mae or Freddie Mac). Loan amounts are considered Jumbo if they exceed the following amounts based on the applicable property type (note: these amounts may change from time to time):

• 1 Family – $417,000
• 2 Family – $553,850
• 3 Family – $645,300
• 4 Family – $801,950

LIBOR index

– The London Interbank Offered Rate Index is the average yield of interbank offered rates for one-year U.S. dollar-denominated deposits in the London Market, as published in The Wall Street Journal.

Lien

– An encumbrance on the property which acts as security for the payment of a debt or the performance of an obligation. A mortgage is a lien. A lender will want most, if not all, liens on the property removed before making a mortgage loan.

Loan-to-Value Ratio

– The mortgage amount divided by the lower of the purchase price or the appraised value of the property. This ratio is expressed as a percentage. A lender will use this ratio in determining the maximum mortgage amount that it will make on the property.

Lock-In/Rate Lock Agreement

– An agreement by the lender guaranteeing the applicant a specified interest rate on the mortgage loan provided the loan closes within a set period of time.

Mortgage

– A pledge of real estate collateral to secure a debt. Also, the legal document describing and defining the pledge. The mortgage may also include the terms of repayment of the debt.

Mortgage Insurance

– Insurance that protects the lender in case the homebuyer does not make their mortgage payments. Typically, a borrower would be required to pay a fee for mortgage insurance if their down payment is less than 20% (also known as private mortgage insurance or PMI).

Mortgage Note

– A document signed at closing which states the borrower's promise to re-pay a sum of money. The note states an interest rate and a fixed period of time (term) for repayment.

Mortgagee

– The lender in a mortgage transaction.

Mortgagor

– The borrower in a mortgage transaction.

Origination

– The first step in the mortgage loan process consisting of the completion of the application.

Points

– See "Commitment Fee" above.

Pre-Approval

– A process in which a conditional commitment is issued after a loan profile is underwritten with all standard documentation except a property appraisal and a title search.

Pre-Qualification

– A process in which the loan officer calculates the housing-to-income ratio and the total debt-to-income ratio to determine an approximate maximum mortgage loan amount.

Prime Rate

– The U.S. Prime Rate is a commonly used, short-term interest rate as listed in the Wall Street Journal.

Private Mortgage Insurance (PMI)

– See "Mortgage Insurance" above.

Processing

– The second step in the mortgage application process which involves the collection and verification of information stated on the application. Credit reports and the appraisal are also ordered at this time.

Pro-Rata Share

– In relation to a cooperative apartment building, the pro-rata share is your unit's share of the building's underlying mortgage. The share is determined by dividing the amount of the underlying mortgage by the number of shares in the building and then multiplying the per-share amount by the number of shares for your apartment. The lower of either the appraised value or purchase price then divides that number.

Ratios

– Percentage applied by the lender during the underwriting of a mortgage loan application to determine how large of a loan to grant to an applicant. The ratios that lenders use are generally the Loan-to-Value Ratio, Housing-to-Income Ratio and Debt-to-Income Ratio.

Recording Fees

– The fee charged by the recorder's office to record documents such as Mortgages, Deeds of Trust, deeds and UCC Financing Statements.

Refinancing

– New loan used to pay off an existing mortgage on the same property.

Seller Contributions

– Payment by the seller of a property of some or all of the buyer's closing costs.

Servicing

– Post-closing activities the lender performs, such as collecting the payments and/or paying taxes and insurance from an escrow account.

Title

– Written evidence of the ownership of property, such as a deed.

Title Search

– A process that examines local public records, laws and related court decisions to determine if any other parties have valid claims against the subject property (such as past-due taxes, judgments or mechanics' liens). It also discloses past and current facts about the subject property's ownership.

Title Insurance Policy

– In real estate, an insurance policy by which the insurer agrees to pay the insured (purchaser, mortgagee, etc.) a specific amount for any loss caused by defects of title to the subject property.

Treasury Index

– The Treasury Index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one, three or five years, as made available by the Federal Reserve Board.

Truth-in-Lending Disclosure

– Federal law requires that the lender must give this document to the mortgage applicant within three business days after loan application. This disclosure gives details of the mortgage payments along with the corresponding APR and finance changes.

Underwriting

– In mortgage lending, the process used to determine whether the loan risk is acceptable to the lender. Underwriting involves the review of the property appraisal and examination of the borrower's ability and willingness to repay the debt.

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