What will my monthly payment be? How much and how often could the payment go up? Make sure you can meet the loan payments now and in the future, especially if you're considering an adjustable-rate mortgage (ARM). "ARMs can be attractive because you're paying less money initially, but understand that those payments are likely to go up," said Cynthia Angell, a Senior Financial Economist at the FDIC. "If interest rates rise and you've got an ARM, you've got to be sure you could handle the higher monthly payments." It's also important to understand the index your interest rate would be tied to and to get a sense of its volatility.
Is there a "balloon" payment? If so, when is it due, and how much will I owe? A balloon payment is a large, lump-sum payment due at the end of the loan term. A balloon feature may keep monthly payments low in the early years, but the loan must be refinanced or paid off in full at the end of the loan term. For some borrowers, a balloon loan can be very appropriate. For others, the consequences can be costly, perhaps even resulting in the loss of their home if they can't repay or refinance the amount due.
What is the Annual Percentage Rate (APR) for this loan? Is this the lowest rate you can offer? The APR is the cost of the loan expressed as a yearly rate, and it includes the interest rate, "points" (each point equals one percent of the loan amount), broker fees and certain other charges. Comparison shop among several lenders, then negotiate the best possible terms.
Are any points, fees or other charges being added to the loan balance and increasing my payments? If so, how much extra will I pay each month and over the life of the loan? Investigate whether it makes sense for you to pay these charges up front or roll them into the loan.
Does the loan amount include fees for credit protection that would cover the loan payment if I die, become ill or unemployed? If so, why, and how much will it cost me in up-front, monthly and total fees? First ask yourself if you really need this type of coverage. You may not need the extra protection, or you may get a better deal from your insurance agent or other sources. If the lender requires this kind of coverage, it must tell you and include the cost in its calculation of the loan's APR. Otherwise, the coverage is entirely voluntary.
Is there a prepayment penalty if I pay off the loan early by refinancing or selling my house? Some lenders offer loans with prepayment penalties at lower interest rates than the same loans without prepayment penalties. Depending on your circumstances —for example, if you do not expect to move during the period subject to a prepayment penalty — a loan with a prepayment penalty can be a good alternative. However, if market interest rates drop, you may miss out on a chance to refinance if the prepayment penalty on your loan is too high.
