Read The Full Note Before Signing

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Just got a search "how can I tell if my prepayment penalty applies to selling my home"

Read The Full Note. You need to do this before you sign it. I know that many people are just thinking "Sign this and I get the house!" or "Sign this and I get the money!" but a lot of loan providers - often the very biggest - scam their customers by talking about one loan with very favorable characteristics, and when it comes time to sign they actually deliver a completely different loan with a prepayment penalty, burdensome and unfavorable arbitration requirements (I've seen stuff that amounted to "the bank chooses the arbitrator"), and any number of other unfavorable terms, not to mention having a higher rate and three times the cost, and being fixed for two years as opposed to the thirty they told you about.

Any loan officer can make up all sorts of paperwork along the way to lull you into a sense of security. The only paperwork that means anything are the papers you actually sign at closing with a notary present. The Trust Deed, the HUD-1 form, and the Note. Concentrate on these three items. The HUD-1 contains the only accounting of the money that is required to be correct (things like do you need to come up with more money than you were told?). And the Note contains all the other information on the loan that your provider might actually deliver. Notice that wording - I said might deliver. Just because you sign the Note doesn't necessarily mean you get any loan, let alone the one that Note is talking about, but these are the terms you're agreeing to now, and most Notes do actually fund. They can't change the terms without getting you to sign a different Note. But once you sign and the Right of Rescission (if applicable) expires, you are stuck.

Get that other loan - the one your loan provider has been talking about up to now - out of your head. This is the moment of truth as to what they actually intend to deliver. The majority of the time, the loan they actually deliver is significantly different from the loan they were talking about before now, and this document is where the truth lies. Amount of the loan (does that match what you were told?). Length of the loan. Period of fixed interest. What the fixed rate is, and how the rate will be computed after the rate starts adjusting. The Payments: how closely do they match what you were told? Payments are a lot less important than the interest you are being charged, but if the payments are $5 more than you were told (or if the interest rate is different), you were basically lied to. If the real loan was available and the principal correctly calculated, the payment should be within $1. $20 off gives the loan provider literally thousands of dollars to soak you for extra fees in, even if the rate is correct. A competent loan officer knows what loans are really available and whether you are likely to qualify, and can calculate pretty closely how much money it takes to get the loan done. From this flows the payment. Payment is a lot less important than most people think, but you do need to be able to make it, every month. Furthermore, that's how most people shop for loans and how unethical loan officers sell bad loans. Shopping by payment is a good way to end up with a bad loan. Many loan officers will tell you about this nice low payment, and conveniently neglect to mention the fact that if you make this low payment, you'll owe the bank $1200 more at the end of the month than you did at the beginning.

So take the time to read the entire Note before you sign. There are all sorts of things lenders slip in. I worked for a very short period at a place that trained its people in how to distract you from the numbers on this and the HUD-1 and the Trust Deed. This is a legally binding contract you are entering into, you are agreeing to everything it says, and there aren't a whole lot of methods of getting out of it if you don't like what it says later. Once the loan funds, you are stuck with the terms, the costs, and everything else. The only way out, in general, is to refinance, which means paying for another set of loan costs and quite likely the prepayment penalty on this loan. Prepayment penalties are multiple thousands of dollars. So don't allow yourself to be distracted. Read The Full Note.

Caveat Emptor


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About this Entry

This page contains a single entry by Dan Melson published on June 28, 2013 8:00 AM.

Buyer's Basic Guide to The Foreclosure Process and REOs was the previous entry in this blog.

Pay a Prepayment Penalty Now or Wait to Refinance Until It Expires? is the next entry in this blog.

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