Questions
To Ask Before
Signing A Loan Contract
What
will my monthly payment be? Can the amount change? What would
cause the payment to change? How much and how often could the
payment go up? When will the loan be paid off?
Just
because a lender says you qualify for a certain loan amount doesn't
mean you are getting a loan that is affordable for you. Make
sure you can meet the loan payments now and in the future.
Is
there a "balloon" payment? If so, what is it due, and
how much will I owe?
A
balloon payment is a large, lump-sum payment due at the end of
the loan term. A balloon loan may keep monthly payments low in
the early years, but it must be refinanced or paid off in full
at the end of the loan terms, and the low payments mean that
relatively little of the loan balance has been reduced. For some
borrowers a balloon loan can be very appropriate. For others,
the consequences can be costly, perhaps even resulting in the
loss of their home if they can't repay or refinance the amount
due.
What
is the APR the annual percentage rate for this loan? Is this
the lowest rate you can offer?
The
APR is the total cost of the loan, including interest charges
and other fees, expressed as a yearly rate. Comparison shop among
several lenders so you have a good sense of the costs you should
be incurring, then negotiate the best possible terms. Don't be
afraid to make lenders compete for your business by letting them
know that you are shopping for the best deal.
What
"points" and fees would I be charged? Are any of these
charges being added to the loan balance and increasing my payments?
If so, how much extra would I pay each month and over the life
of the loan?
Each
point equals one percent of the loan amount. Make sure you have
a good understanding of all costs, terms and conditions of the
loan. Compare verbal answers with what is written in your loan
documents.
Does
the loan amount include fees for credit insurance, such as life,
disability or unemployment insurance? If so, why, and how much
will it cost me in up-front, monthly and total fees?
You
may not need the extra insurance, or you may get a better deal
from your insurance agent or other sources, so shop around. Also,
the lender is prohibited from conditioning approval of a loan
on whether you buy insurance through the same company. Be very
suspicious if the lender pushes single-premium insurance. The
one-time payment usually is so big that consumers add the fee
to their loan amount and pay interest each month, adding significantly
to the monthly payments and to the total cost.
Is
there a prepayment penalty if I pay off the loan early by refinancing
or selling my house? What is the penalty?
On
some loans, a prepayment penalty will be charged if you pay more
than is required on your monthly payment or pay off the loan
before its term ends. May lenders offer loans with prepayment
penalties at lower interest rates than the same loans without
prepayment penalties. Depending on your circumstances, a loan
with a prepayment penalty can be a good alternative. However,
prepayment penalties also can trap a borrower into a loan. For
example, if market interest rates drop, you may miss out on a
chance to refinance if the prepayment penalty on your loan is
too high. Under the Truth in Lending Act, lenders must disclose
any prepayment penalty and how it is determined. If the lender
says there is no prepayment penalty, there should be a statement
to that effect in the documents. You should ask the lender to
show you where that is stated in the documents.
Do
any of the loan terms differ from what was previously discussed
or provided? If yes, which terms and why?
Review
documents prior to signing them and make sure you understand
why any changes in terms and conditions have been made.
