Finding the Right Lender
Contact several lenders, and be very careful about dealing with a lender who just appears at your door, calls you, or sends you mail. Ask friends and family for recommendations of lenders. Talk with banks, savings and loans, credit unions, and other lenders.
Comparing loan plans can help you get a better deal. Whether you begin your shopping by reading ads in your local newspapers, searching on the Internet, or looking in the phone book, ask lenders to explain the best loan plans they have for you. Beware of loan terms and conditions that may mean higher costs for you. Get answers to these questions:
Interest Rate and Payments
What are the monthly payments? Ask yourself if you can afford them.
What is the annual percentage rate (APR) on the loan? The APR is the cost of credit, expressed as a yearly rate. You can use the APR to compare one loan with another.
Will the interest rate change during the life of the loan? If so, when, how often, and by how much?
Term of Loan
How many years will you have to repay the loan?
Is there a balloon payment -a large single payment at the end of the term after a series of low monthly payments? When the balloon payment is due, you must pay the entire amount.
Points and Fees
What will you have to pay in points and fees? One point equals 1 percent of the loan amount (1 point on a $10,000 loan is $100). Generally, the higher fees are more than 5 percent of the loan amount, ask why. Traditional financial institutions normally charge between 1 and 3 percent of the loan amount in points and fees.
Are any of the application fees refundable if you don't get the loan?
How and how much will the lender or broker be paid? Lenders and brokers may charge points or fees that you must pay at closing or add on to the cost of your loan, or both.
What is the penalty for late or missed payments?
What is the penalty if you pay off or refinance the loan early (that is, is there a prepayment penalty)?
After you have answers to these questions, start negotiating with more than one lender. Don't be afraid to make lenders and brokers compete for your business by letting them know you are shopping for the best deal. Ask each lender to lower the points, fees, or interest rate. And ask each to meet-or beat-the terms of the other lenders.
Once You've Selected a Lender, Get the Fees in Writing
A "Good Faith Estimate" of all loan charges should be provided. The estimate must be sent within 3 days of applying. Blank copies of the forms you'll sign at closing, when the loan is final. Study them. If you don't understand something, ask for an explanation. Advance copies of the forms you'll sign at closing with the terms filled in. A week or two before closing, contact the lender to find out if there have been any changes in the Good Faith Estimate. By law, you can inspect the settlement statement (also called the closing disclosure form) one day prior to closing. Study this form. Write down any questions you want to ask.
Don't Sign if the Lender …
- Tells you to falsify information on the loan application (for example, suggests that you write down more income than you really have).
- Pressures you into applying for a loan for more money than you need, or one that has monthly payments larger than you can afford.
- Promises one set of terms but gives you another with no good reason for the change.
- Tells you to sign blank forms or forms that aren't completely filled in. If an item is supposed to be blank, draw a line through the space and initial it.
- Pressures you to sign today. A good deal today should be available tomorrow.