Here’s one you can file in the “shocking, but not surprising” category: A 2007 government study found that 90 percent of people surveyed didn’t understand some basic mortgage agreement terms. It’s shocking because for most people, their mortgage is their biggest and most important financial commitment. It’s not surprising, though, because these mortgage forms are often presented to us in an overwhelming flurry of paperwork. But rather than directing you to the 282-page Federal Trade Commission report so you can find out for yourself what you don’t know, we’ve put together a list of the most important information people don’t understand. (You can thank us later.) Here are seven things to look for in your loan:
1. Settlement costs
A mortgage with the lowest interest rate isn’t necessarily the best deal, because lenders can tack on a variety of charges – such as discount points, origination fees and title-related costs -- that can drive up the effective price of your loan. Don’t hesitate to ask potential lenders to explain each item included on the Good Faith Estimate of Settlement Costs.
2. Optional charges
Make sure you understand if a loan proposal includes charges for optional products, such as credit insurance, which protects the mortgage loan if you can’t make your payments.
3. Prepayment penalties
Chances are, you’ll pay off your mortgage before the term is up – either by selling your home or refinancing your loan. Be aware of any prepayment penalties your mortgage might include.
4. Escrow arrangements
In most – but not all – cases, part of your monthly mortgage payment may go into an escrow account, which is used by the lender to pay your homeowners insurance and property taxes. When you are quoted a monthly payment, make sure you understand whether it includes money for insurance and taxes and whether you or your lender will be responsible for making sure those bills get paid. Also ask your lender how much you’re required to put into the escrow account at closing.
5. Interest rate versus APR
Don’t confuse the interest rate on a loan with the annual percentage rate, which takes into account both the interest rate and other fees charged by the lender over the life of the loan. Evaluating the differences between the interest rate and the APR is a good way to compare loan offers. To learn more read: Interest rate versus APR.
6. Cash due at closing
You don’t want any surprises when it comes time to finalizing the purchase of your new home. Understand precisely how much you need to bring on closing day for your down payment plus any settlement costs.
7. Balloon payments
Talk about burst bubbles! Be sure you know whether or not you’ll need to make a large, lump-sum payment – known as a balloon payment -- at the end of your loan term.
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