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?

The main focus at a closing is to sign the final paperwork. The four main items to review and/or sign during closing are:

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:

Do not sign your Glossary Term:HUD-1 Settlement Statement layer if it’s significantly higher than your Glossary Term:Good Faith Estimate layer (see the Understanding the closing costs section of the article for more about the Good Faith Estimate), if you see a different rate on your loan than you agreed on, or if there are any additional clauses in your paperwork that weren’t explained to you. Don’t sign anything until you can resolve these issues with your lender and are satisfied with all the terms of your loan. If you can’t resolve these issues and you haven’t signed anything, you are free to walk away. Don’t feel pressured—after all, it is your money.

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

You will receive a Good Faith Estimate (or GFE) several days after submitting your loan application. The GFE is an estimate of your loan’s 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:

Some fees on your Good Faith Estimate and HUD-1 Settlement Statement are paid outside of closing (or “POC”). This means the fees have been paid or must be paid separate from your closing costs. This commonly includes fees for credit reports and appraisals that you will usually pay in advance. Other POC fees may include those paid by your lender to a mortgage broker, but these are usually included in the interest rate or other settlement charge and are not an additional cost to you.

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?

Your lender will order the appraisal to be performed by a licensed appraiser. Borrowers are typically required to pay for the appraisal, and the cost will appear on the Glossary Term:HUD-1 layer closing document as part of your Glossary Term:closing costs layer.

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 appraiser does not necessarily look for potential defects in the home. That’s a home inspector’s role.

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.

To get a clearer view of the home loan process, it’s helpful to know some of the factors that will be considered when your mortgage application is reviewed.

When you apply for a mortgage, your loan officer will forward your application and the supporting documentation to an Glossary Term:underwriter layer. It's the underwriter's responsibility to review your loan scenario and the supporting documentation to ensure that it meets the loan program guidelines, to determine whether or not you qualify for the loan.

The underwriter looks at your application to see if it meets these basic criteria:

1. Your ability to repay the loan. This requirement basically asks, "Is your income enough to cover the new mortgage payment and all your other monthly expenses?" To figure this out, lenders use your debt-to-income ratio (DTI). To calculate yours, add up 2 things: your projected monthly home payment and your other recurring debt (monthly payments toward loans and credit cards, for example). Do not include expenses like your electric bill or phone bill. Divide that total number by your monthly pre-tax income to find your ratio. Most lenders want your debt-to-income ratio to be 36% or less, but the ratio that works best for you is the one that you can comfortably afford. If you're self-employed, tell your lender so they can help guide you through any specific questions about your employment or income.
2. Your likelihood to repay the loan. Your payment history and Glossary Term:credit score layer are indicators to lenders of your likelihood to make payments in the future.
3. The home value. The underwriter carefully looks at the home value (based on a professional appraisal ordered by your lender) of the property you are purchasing to verify that it meets or exceeds the purchase price. This will also help them ensure the Glossary Term:loan-to-value layer (LTV) ratio fits within the loan program guidelines. (For more complete information, read The home appraisal process.) To qualify for a conventional loan, most lenders require you to have a loan-to-value ratio of no more than 80-95%. The higher your home's value and the less you owe on it, the lower your LTV ratio.
4. For a purchase, the source of funds for your down payment. The underwriter will verify your Glossary Term:down payment layer funds. If you have a down payment of less than 20%, you will typically be required to pay private mortgage insurance (PMI), which increases your monthly mortgage payment. The underwriter will review your documentation to estimate whether you have enough money to cover Glossary Term:closing costs layer. You may also be required to have set aside two or more monthly mortgage payments as Glossary Term:reserves layer, depending on the loan program and/or loan amount. Lenders typically require reserves to cover your mortgage payment in case of emergencies or unforeseen events.

As you move forward, keep in mind that your income, debt, credit history, down payment and savings (if applicable), the home's value and your loan program's guidelines will all play a role in whether your loan application is approved.
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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.