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Purchasing a loan is very likely to be one of the most serious financial decisions you make. This is especially so if you are looking to consolidate a number of debts, or refinance a subprime (i.e. expensive) mortgage. Signing a loan, or refinancing an existing one, is often a complicated process; the jargon used is difficult to understand and the indexes and complicated terms used to define a loan can be very confusing. This is why too many borrowers go for the first loan they are offered, the one their neighbor or friend recommends, or the one that looks cheapest but isn’t.
You can avoid this by taking some simple but important steps when looking for a loan. Look at the task as a job, a very well paying job, because the difference between a bad loan and a prime loan can mean thousands and thousands of dollars in your pocket. Think of yourself as an investor and commit yourself to choosing the best possible loan. Deciding which loan is the best for you is not as easy as it should be. There are hidden costs, varying rates of interest, prepayment penalties, and other factors that make deciding which loan is best more complicated than simply comparing the cost of the monthly payments.
- Get a clean sheet of paper and write down the names for at least three loans you want to choose from in three wide columns. The more loans you have to choose from the better, but it can get a little daunting when you have too many.
- Write down the contact names, numbers and address of each lender.
- Write the length of the loan terms. Obviously the shorter the term the less interest you will pay.
- What type of interest rate does it have? Fixed, variable, ARM?
- What is the initial interest rate?
- When will the interest rate change? Many loans offer a low initial interest rate as a sweetener that change after three or six months.
- How often can the interest change?
- What is the maximum rate you will have to pay? Some variable loans come with a rate ceiling or maximum that provides borrowers with a worst case scenario they can plan for.
- What is your initial monthly payment after all expenses have been included?
- Is there a balloon payment? Many lenders keep monthly payments low to attract customers but leave a huge sum to be paid at the end of the loan term.
- If there is a balloon payment, how big is it and when does it need to be paid?
- Work out what is the most you can expect to pay on your loans in six months, twelve months, and twenty-four months.
- Do the loans have prepayment penalties if you want to pay the loan faster and save money on interest?
- What is the penalty?
- What is the lender’s fee on the loan?
Weigh up the answers to all these questions (and any more you can think of) and decide which is the best loan for you. Before deciding on your loan, loan modification, or debt consolidation loan talk with a qualified (and free) HUD counselor (find one near you at www.hug.gov) . They can provide you with practical advice on how to make a good decision on your mortgage.
Last 3 posts by Andrew
- Loan Modification Tips: How to Choose the Better Loan? - April 29th, 2010
- Top 5 Loan Modification Tips to Avoid Foreclosure - April 24th, 2010
- Banker's Choose not to Swallow Obama's Loan Modification Bitter Pill - April 18th, 2010
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