Borrowing Basics: Questions To Ask Before You Take Out A Loan

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By Mia Bolaris-Forget

Money is something we all think about or need to borrow at one point or another. Whether you want to buy a home, a car, make some home improvements or invest in your child’s education, borrowing money requires some financial savvy. Here are some suggestions of things to consider.

1. Is There An Early Payment Penalty: While you wouldn’t think you have to be penalized for paying off your loan, it’s imperative to remember that lending institutions make their money off of interest payments, so the sooner you pay off your loan, the less money they are inclined to make. While there IS a dictum within the Truth in Lending (TIL) form, experts note that the clause is quite confusing and not very clear. And, they emphasize that anytime a contract says there’s the potential of a penalty, consider that a direct affirmation of such.

2. Ask About “Hidden” Fees: While the Truth In Lending required certain up front fees be disclosed, others remain well “hidden’. In order to avoid any unexpected surprises you may want to find out what they are up front.

Experts point out that these costs, not shown on the TIL are shown on the Good Faith Estimate, a separate document rendered by the Department of Housing and Urban Development. However, they note, that the GFE blends lender fees with third-party charges, and offers a vague total that does not obligate or commit the lender, especially since the figures are merely “estimates”.

Once you’re “locked” into the loan, the lender is also “locked” into the rates and points but not to the fees, and may lead to being taking advantage of. Experts say that this can be easily addressed by the Federal Reserve by simply requiring all locks apply to the annual percentage rate derived from the rate and all lender fees. Since it doesn’t, you must do the “dirty work”.

Financial experts advise asking lenders to put the total amount, including (closing) fees in writing, signing and dating it.

3. Inquire About The Margin: This applies to adjustable-rate mortgages (ARMs) only. The margin on the ARM refers to the lender’s markup or amount added to the interest rate index to yield a new rate; and can range between 1.5 percent to 6.5 percent.
Professionals point out that lenders generally quote one rate on an ARM, but rarely quote the margin, since disclosure is not required. Furthermore they note, that the initial rate quoted only holds for about 1-3 months. While the borrower often knows the rate for these first few months, he/she rarely knows the lenders markup pertaining to the remainder. They advise asking your lender to write down the margin, date it and sign it.

4. Identify The Loan As Simple Interest Or Not: With simple interest loans the borrower is subject to daily increases in interest and substantial penalties for past due payments. Furthermore, according to experts, most borrowers never even knew about these charges until problems actually arose.
Industry officials recommend asking, though they note that you probably won’t be aware of it until you sign at closing, and even then, the disclosure remains questionable. Be aware of the possibility for your servicer can switch your loan to a simple interest loan without your notification or consent, especially if there is no note prohibiting it.

5. Get Specifics On The Subordination Policy: According to financial experts, most borrowers who seek out a second mortgage are aware that their lender can prohibit them from refinancing their first mortgage. They explain that when the first mortgage is repaid, the existing second mortgage replaces it as the first mortgage that is unless the second loan lender is amicable to subordinate his claim to that of the second lender, offering the new mortgage as the one into which the borrower is financing.
Professionals note that second mortgage policies vary from lender to lender and range from small fees and no conditions to absolute prohibition. Borrowers considering a second mortgage are advised to retain the lender’s subordination policy in writing prior to closing the loan.