How to read and understand your loan documents
Reading and then actually understanding your loan documents can seem like one of the worst tasks of Hercules. In other words: impossible for any mere mortal. However, you should not despair! Not only is it not as difficult to read and understand your loan documents as you think it is, it is also incredibly important that you do understand your loan documents, so that you don't end up paying tens of thousands of dollars more than you thought that you did, and especially so that you don't end up in a worst case scenario, in which you lose your home.
As you apply for loans and as you read through your loan documents, there are a number of steps that you can follow in order to protect yourself from bad loans. While many of these steps are specifically for home equity loans, the information can be applied to all types of loans. The caution especially can be applied.
1. Start by knowing your credit score and your credit rating.
- Start by knowing your credit score and your credit rating.
Before you even apply for a loan, you need to check on your credit score. Knowing your credit score and credit rating is important for several different reasons. First of all, if there are any mistakes, then you can correct them right now before you apply for loans, so that you can get the rates that you deserve.
Also, if you know that you have a high credit score but a lender wants to give you higher rates and fees for your loan than you deserve, you can call hem on it. You can order your credit score for free once a year from the three major credit reporting companies. Here they are:
- Equifax: (800) 685-1111, www.equifax.com;
- Experian: (888) 397-3742, www.experian.com/consumer; and
- TransUnion: (800) 916-8800, www.transunion.com/index.jsp.
- Beware using home equity loans as a way to consolidate your credit card debts.
Unless you can find a really, extra-good home equity loan with fantastic rates, it might be better just to pay off your credit cards. If you screw up your home equity loan payments, then you lose your house. - Shop around for the right loan.
In order to find the right loan, you need to go to a number of different lenders. Make sure that you ask for a detailed explanation of the loan, taking care to focus on knowing absolutely every one of the fees attached to the loan and if they could ever go up any time. The lowest monthly payment might not be the right option! - Found the right loan? Do all of the following before you sign.
- Read through the entirety of all of the loan papers.
- Have someone else there such as a lawyer or a friend who knows what's going on. Have them read through the loan papers also.
- Even if you've had all the fees explained, have them explained again.
- Ask lots of questions, and take your time! This is a big deal.
- Look carefully at the loan documents. Are there any blank spaces that could be filled in after you sign?
- If you find anything in the loan documents that you didn't expect, then you should walk out.
- Make sure that you know the following information:
- the total cost that you will be paying back. This includes all fees and interest.
- the APR (annual percentage rate)
- how long you have to pay back your loan
- the number of payments that you will have to make and how much each one will be.
- how much money you have actually borrowed.
Consider using a housing counselor. You can find certified counselors through the U.S. Department of Housing at 1.888.466.3487 or at http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
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