How many points are you paying on the loan?
When you take out a mortgage or home equity loan, you will probably have to pay "points" as a fee to the lender. One point is equal to 1 percent of the value of the loan – if you are borrowing $10,000, for example, one point would be $100. The number of points charged varies depends on the lender, the size of the loan, the type of loan and your credit rating. Taking the time to find a lender who is willing to charge you fewer points can save you a lot of money.
What is the dollar value of the points?
Since a "point" equals 1 percent of the value of your loan, the dollar amount of the points your lender charges can vary a lot depending on the size of your loan. For example, on a $10,000 loan, one point would be $100, but on a $100,000 loan, one point would be $1,000. Make sure you understand not just how many points you are paying your lender, but how many dollars that number equals.
How much is the loan origination or underwriting fee?
Your loan broker or lender will usually charge you a fee. Be sure you understand exactly how much they are charging you, and share the amount with a financial advisor or credit counselor to make sure you're not being overcharged.
How much are the closing costs?
Closing costs include a variety of fees and charges that you must pay as part of the cost of taking out a loan. They may include an origination fee, an attorney's fee, taxes, escrow payments, and charges for title insurance. Unfortunately, some unethical lenders or brokers might hide excessive or unnecessary fees in your closing costs. Make sure your lender gives you a complete breakdown of all closing costs in advance so you can show them to a financial advisor or credit counselor.
What does each fee you are paying to get the loan include?
To ensure that you aren't being overcharged, ask your lender and a financial advisor or credit counselor to go through every fee you're being charged with you so you understand exactly what you're paying for and how much.
How much are you paying for private mortgage insurance (PMI)?
Lenders may require you to buy private mortgage insurance (PMI). PMI protects the lender in case you default on your loan. However, recent changes in laws mean that you might not have to buy PMI or you might be able to cancel it before you repay the entire loan. Requirements vary depending on the kind of loan you are taking out and your credit history. Talk to a credit counselor for more information on PMI and your personal situation.
Are you paying for credit life insurance?
When you take out a home equity loan, your lender might offer to sell you credit life insurance. Credit life insurance pays off the loan if you die. If you buy this insurance, you can either make monthly payments or take out "single-premium credit insurance" by financing the full cost when you take out your loan.
Before you agree to buy credit life insurance, you should know:
- Credit insurance is always optional; you are never required to buy credit life insurance when you take out a loan.
- "Single premium" insurance is a very expensive option, because you are paying interest on the cost of your insurance premium over the life of your loan.
- A traditional life insurance policy is often a cheaper alternative to credit life insurance. Make sure you consider which option is best for you.
- Most states give you a certain period of time to cancel credit insurance and get a full refund. For the specific rules in your state, as your state consumer protection office.
What is the total amount of all fees and closing costs?
It's important to know the details of all the fees and closing costs. But you also need to know the bottom line: how much are you being charged to take out your loan? If you think that amount is too high compared to the amount you're borrowing, talk to a credit counselor to see if you're being overcharged or find another lender who can offer you a better deal.
Are you paying fees and closing costs up front, or financing them as part of the loan?
If you can't afford to pay the fees and closing costs involved in taking out a loan, your lender might give you the option of financing them as part of the loan. The amount of money you receive from the lender would be the same, but the size of the loan you must repay (and your monthly payments) would be larger because it would include both the money you get and all fees and closing costs. Financing your fees and closing costs lets you avoid paying a lot of cash up front, but you should be aware that you'll actually end up paying much more because you'll pay interest on these costs over the life of your loan.
What is the total amount of the loan?
Before you sign any loan papers, make sure you know exactly how much you're borrowing. Remember, the loan amount you must repay might include more than just the money you receive if you choose to finance your loan fees, closing costs, insurance or other items as part of your loan.
What is the annual percentage rate (APR) on the loan?
Make sure your lender tells you not just your loan's interest rate, but also the annual percentage rate (APR). APR is a more accurate measure of how much the loan will cost you because it takes all costs into account, including fees and closing costs as well as interest. For example, if you take out a $10,000 loan and pay $1,000 in fees, the actual amount you are getting is only $9,000. APR shows the true cost of the loan to you because it is based on the $9,000 you are actually getting instead of the $10,000 value of your loan.
Is the interest rate fixed or adjustable?
A fixed interest rate means that you will pay the same rate as long as you have the loan. If interest rates are now relatively low or expected to increase in the future, a fixed rate may be your best option. An adjustable rate means that the interest rate on your loan (and therefore your monthly payment) will rise or fall depending on what national interest rates do. If rates are now relatively high or expected to fall in the future, you may want to consider an adjustable rate. A credit counselor can help you decide what option is right for you.
If the rate is adjustable, how much can it change and how quickly?
If you decide on a loan with an adjustable rate, get written information from your lender about how fast your rate – and therefore your monthly payment – can change, and if there is a limit on how high the rate can go if national interest rates rise and how low it can fall if national rates decline.
What will your monthly payment be?
Your lender is required to give you, in writing, exactly what your monthly loan payment will be. Don't sign any papers until you get this information.
What is the total amount you will pay – including principle and interest – over the life of the loan?
Your lender must tell you the total amount you will have to pay – including interest charges – over the life of your loan. Depending on your interest rate, the amount of time you take to pay it back and other factors, you might end up paying back far more than you borrow. Compare the amount of cash you're getting now with the total amount you'll be repaying before you decide whether a loan makes sense for you.
Are there any penalties for paying the loan off early?
Lenders may offer you a lower interest rate in exchange for a promise from you not to pay off the loan before a certain time. If you agree, you will probably have to pay a penalty if you change your mind and try to pay the loan off early. Always ask if there is a "prepayment penalty" on your loan, and, if so, how big the penalty is and the conditions attached to it.
Is there a balloon payment?
Lenders may offer you a lower interest rate if you agree to pay off the loan in one large lump sum after a period of perhaps five or seven years. This "balloon payment" option can reduce your monthly payments, but you must be sure you can make the single large payment at the end of the loan period. Be very careful about choosing this option. Ask you lender exactly what the terms are, think about whether the immediate savings are worth the financial difficulty you might experience when the balloon payment is due, ask yourself whether you're sure you will be able to make the balloon payment, and consult a financial advisor or credit counselor.
Will the money be paid directly to you?
When you take out a home equity loan, the loan money should always be paid directly to you. NEVER agree to let the lender pay the money to someone else. In some cases, home equity loan money has gone directly to a home improvement contractor or other service provider. Often, the work the loan money is meant to pay for is never done, and the borrower loses his or her house. ALWAYS get a check from the lender yourself, and NEVER borrow through a home improvement contractor.
