The Home Loan Guide

Know What to Look For In Your Loan.

This home loan advice really serves to protect you from accepting the wrong loan. Many home loans have restrictive covenants that often disguise large expenses or create penalties that could have been avoided. Here are some things to look for in your loan, or questions to ask, before you accept any loan:

Does the Loan Appear Too Good to be True? - If so, it probably is. Check all of the loan covenants carefully before accepting the loan. Look carefully for any hidden costs and enquire about any covenants that you don't understand.

Prepayment Penalty - Make sure that the loan you apply for has NO PREPAYMENT PENALTY. Prepayment penalties have become less and less common, however sometimes a lender will try to add a covenant that adds a fee for any early payments of principal or an early loan payoff. These loan covenants protect the lender from the risk that interest rates go down and that you pay the loan off early. In some cases, a prepayment penalty is acceptable, but only in cases where 1) you are positive that you will not pay off the loan early, even if interest rates decline, 2) if the prepayment penalty is low and 3) if the loan interest rate is lower because of the stipulation. If you take on a loan with a prepayment penalty, you will be often be subject to large fees if you decide to refinance the loan or to pay off the loan early. Sometimes, prepayment penalties only apply during the first 5 to 10 years of a loan. The important point here is that you understand the covenant and that you leave yourself with as much flexibility as possible.

Loan Fees - Loan fees are sometime obsessive. Try to avoid a lot of loan fees. Loan fees are typically quoted as a percent of the mortgage. Understand that these fees are negotiable. If a lender offers you a loan with a 2% loan fee. Tell them that you'll accept if they cut the fee to 0.5%. They won't always be able to lower the fees, but if they won't, make sure that the higher fees are worth it. Higher loan fees can be worth it if they also offer lower interest rates or some other attractive loan incentive.

Mortgage Points - Mortgage points, also known as loan points, are fees paid by you that effectively lower your mortgage interest rate. For example, one lender may offer you an 8% loan with 0 points and another lender may offer you a 7% loan with 2 points. To translate what this means, it means that you can either get an 8% loan, or you can get a 7% loan, but to do so, you need to pay, upfront, in cash, 2% of the entire loan value you are borrowing. The rule of thumb on mortgage points is that, if you keep the loan longer than 7 years, it is worth paying the points to reduce your mortgage interest rate. If there is a good chance that you will pay off, or refinance the loan within 7 years, then you are probably better off taking the 8% loan with zero points.

Appraisal Fees - Appraisal fees are almost always required when getting a first mortgage. However, if you are getting a second mortgage, a home equity loan, a home equity line of credit (HELOC), a home improvement loan or a consolidation loan, you may not need an appraisal. Appraisal fees range from $150 to $800, depending on where you live and what type of home you own. Also, a loan that does not require an appraisal is often quicker and less expensive than a loan that requires a new appraisal.

Inspection Fees - Inspection fees are usually only required for first mortgages. And then usually only for older houses or for areas that are susceptible to earthquakes, floods, termites, etc. If you are applying for anything but a first mortgage, you should try to negotiate these fees out of your loan.

Compare everything - After you apply for a loan, make sure that you compare each loan offer that you receive. Some may offer low interest rates and high loan fees. Others may offer higher interest rates but other more favorable loan terms. It is up to you to assess these different options and to make the decision as to which loan offer is best for you.

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