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.

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.

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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