Reading a Loan Policy

Reading a loan policy may not be on the top of your list of things to do on a sunny summer day, but it is an important thing to do before you sign on the dotted line. If you do not read your policy you could be agreeing to more than you realize. Reading it thoroughly and carefully will help you understand if you are being given a reasonable interest rate, if that interest rate will ever change, and understand if you are able to pay off your loan early.

Variable Interest

Many people wrongfully assume that the interest rate they agree to is going to be the same interest rate for the life of the loan. But, if you do not read your policy carefully, you could be agreeing to a variable interest rate. An adjustable rate mortgage, also known as an ARM, has an interest rate that could fluctuate throughout the life of the loan. This means that the rate could go up or down and impact your mortgage payment amount for your mountain side home building.

Often times the interest rates of an ARM will be higher when the economy is poor. And, you definitely do not want your mortgage payments to increase in a poor economy. If they do you could be left with a mortgage payment that exceeds what you are able to afford. So, when you read through the fine print it is a good idea to make sure that you are agreeing to a fixed rate loan. If you look over a loan policy that you have already agreed to and realize you have agreed to an ARM then it is a good idea to try to refinance with a fixed rate mortgage when interest rates are low again.

Mandatory Homeowners Insurance

A lender usually requires that the homeowner has homeowners insurance for the property. The insurance must be 100% of the value of the property so that if your home were to burn to the ground it would be completely covered by your insurance company. This is to protect the lender so that the property, that can be used as collateral if you default on your loan, is protected. If you are a first time homeowner it is a good idea to get an insurance quote prior to your purchase so that you know that you can afford to fit that necessary expense in your budget in addition to your new mortgage payment.

Property Taxes Included

You will want to be certain of whether the property taxes are included in your mortgage payment or if you are responsible for these on your own. Most often banks set up an escrow account and include your property taxes in your mortgage payment. If this is the case then you will need to know where to send your property tax bill when it arrives. If your property taxes are not included in your mortgage payment then you will need to make sure to set aside money each month so that you are not in financial trouble when tax time comes around.

Even though you have the best intentions as a new homeowner, reading a loan policy to know what your penalty is for a late payment is also important. You may anticipate never making a late payment, but we all know that sometimes money is tight and bills must wait until funds are available. Make sure that the penalty is reasonable so that you are able to easily get caught back up on your mortgage. If the penalty is too high your debt could skyrocket out of control very quickly as you fall further behind.

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