Buying a home, business, vehicle, or other large purchase begins with choosing the right lender. With so many variables to consider, thorough research is essential to securing the right loan at the right rate. Before you secure a loan, here’s what to look for in a lender prior to signing on the dotted line.
Start with the Rates
Interest rates are a good starting point, but they are not the last. You should never choose a lender based solely on the published rate. It is not uncommon for there to be many caveats and hidden provisions to published rates. These should be thoroughly researched because sometimes the lowest published rate isn’t the best deal.
Once you find a rate whose loan terms and conditions match your needs, ask the lender about any restrictions or hold period that may apply. Many lenders will hold a rate for 30-45 days which gives you time to make a purchase. It is also a good idea to ask the lender what will happen if rates drop in the interim. Some lenders will automatically adjust the rate in your favor so it is worth inquiring as to your prospective lender’s policy.
Plan Ahead for Extra Payments & Refinancing
Unless it’s a depreciable asset, it’s always advisable to pay off a loan as soon as possible. Doing so can save you a tremendous amount of money in interest payments. However, lenders attempt to discourage this practice by tacking on hefty prepayment penalties. That’s why you want to look for a lender who offers lump-sum prepayment options that you can make at any time throughout the year.
Prepayment options can range from 10 to 30% of the original loan amount. In some cases, you may even be able to make multiple payments spread throughout the course of the year. In fact, most lenders will allow you to increase your total annual payments by 15-20%. The greater the flexibility your lender offers in this regard the better financial position you will create for your future.
Moreover, you will want to discuss the potential to refinance down the road should the rates drop. Knowing whether or not you can refinance to purchase another home can help you chose a lender that gives you the flexibility your family and finances can benefit from.
Read the Small Print and Red Ink Carefully
Closed mortgages and open mortgages alike are filled with details that can cost you considerably if you don’t know what to look for in a lender. The devil’s in the details, and can include hefty penalties if you seek to discharge the loan before the scheduled date.
When reviewing potential penalties, be prepared to pay roughly 3 months of interest for a fixed rate loan. If you discharge the loan early, the lender will seek the amount which is greatest. Moreover, don’t expect to pay based on your secured loan rate as most lenders will use the most recently published rate when making this calculation.
If you’re seeking to avoid penalties on an early loan discharge, ask about the ability to port the loan to a new property. Some lenders will give you 60 days to port the loan to a new property if you need to move.
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