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As with any contract, there are terms that you should
be aware of. Some of these terms you should run from completely.
If you are not careful, you might be charged ridiculous
fees or suffer interest rate increases for late payments.
Here are a few choice terms to look out for:
Interest Rate Increase
Some loan contracts state that in the event there is a
late or missed payment, the interest rate for the life
of your loan will increase. This could potentially cost
you thousands in the long run. This type of provision
should be absolutely avoided. Try to have it removed from
the contract altogether or find a home equity lender that
will exclude it.
If you are unable to get away from this provision, try
to have the lender set the rate increase to something
manageable. Either way, before you accept the loan you
should be fully aware of what incidents can trigger the
interest rate increase.
Pre-payment Penalties
This kind of provision, some might consider to
be ridiculous. A pre-paid penalty is incurred when a loan
is paid off before its scheduled pay-off date. One might
wonder why this provision exist in some contracts. This
is becuase some lenders will only make money off the interest
accumulated over time. So, to have a loan paid off early
cuts into their calculated earnings.
You should try to have this provision removed from your
loan contract. If the mortgage lender agrees to this,
they might attempt to raise the interest rate to compensate
for the potential loss. If they do not increase the interest
rate, there is a possibility your closing cost will increase.
If you have a choice between the two, it is best to go
with an increased closing cost because it is a one time
fee. Higher interest rates will usually accumulate over
time. The standard pre-payment penalty is somewhere around
10%, but it may differ in each case.
Also, be aware that selling your house early or refinancing
can both be considered pre-payment of a loan. If you will
possibly be moving during the term of your loan, the provision
should definitely be removed from your loan contract.
Insurance
Insurance on your loan pays off the loan in the event
that a you are unable to do so. This coverage only protects
you in specific cases such as death or dismemberment.
This is an optional plan and it should be carefully considered
before it is accepted.
Keep in mind that the cost of a life insurance or alternative
coverage could work out to be a cheaper solution.If you
do decide to keep the credit insurance option, be sure
you understand what situations are covered.
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