Top Questions to Ask Your Loan Officer
Financing a business such as a store, office, or apartment building can be a confusing and frustrating experience. Borrowers are often subject to unwieldy demands and requirements imposed by traditional lenders (such as banks, lending institutions, etc.) since these lenders are regulated and generally averse to risk-taking.
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Financing a business such as a store, office, or apartment building can be a confusing and frustrating experience. Borrowers are often subject to unwieldy demands and requirements imposed by traditional lenders (such as banks, lending institutions, etc.) since these lenders are regulated and generally averse to risk-taking. Becoming well informed can save you time and money during the loan origination process and in the future. Here is a list of questions that you should generally ask your loan officer.
- What will my monthly payment be? Can the amount change? What would cause the payment to change? How much and how often could the payment go up?
Just because a lender says you qualify for a certain loan amount doesn’t mean you are getting a loan that is affordable for you. Make sure you can meet the loan payments now and in the future.
- Is there a “balloon” payment? If so, when is it due, and how much will I owe?
A balloon payment is a large, lump-sum payment due at the end of the loan term. A balloon loan may keep monthly payments low in the early years, but it must be refinanced or paid off in full at the end of the loan term, and the low payments mean that relatively little of the loan balance has been reduced. For some borrowers, a balloon loan can be very appropriate. For others, the consequences can be costly, perhaps even resulting in the loss of their home if they can’t repay or refinance the amount due
- What is the APR—annual percentage rate—for this loan? Is this the lowest rate you can offer?
The APR is the total cost of the loan, including interest charges and other fees, expressed as a yearly rate. Comparison-shop among several lenders so you have a good sense of the costs you should be incurring and then negotiate the best possible terms. Don’t be afraid to make lenders compete for your business by letting them know that you are shopping for the best deal.
- What “points” and fees would I be charged? Are any of these charges being added to the loan balance and increasing my payments? If so, how much extra would I pay each month and over the life of the loan?
Each point equals 1 percent of the loan amount. Make sure you have a good understanding of all the costs, terms, and conditions of the loan. Compare verbal answers with what is written in your loan-documents.
- Does the loan amount include fees for credit insurance, such as life, disability, or unemployment insurance? If so, why, and how much will it cost me in up-front, monthly, and total fees?
You may not need the extra insurance, or you may get a better deal from your insurance agent or other sources, so shop around. Also, the lender is prohibited from conditioning approval of a loan on whether you buy insurance through the same company. Be very suspicious if the lender pushes single-premium insurance. The one-time payment usually is so big that consumers add the fee to their loan amount and pay interest each month, adding significantly to the monthly payments and to the total cost.
- Is there a prepayment penalty if I pay off the loan early by refinancing or selling my house? What is the penalty?
On some loans, a prepayment penalty will be charged if you pay more than is required on your monthly payment or pay off the loan before its term ends. Many lenders offer loans with prepayment penalties at lower interest rates than the same loans without prepayment penalties. Depending on your circumstances, a loan with a prepayment penalty can be a good alternative. However, prepayment penalties also can trap you into a loan. For example, if market interest rates drop, you may miss out on a chance to refinance if the prepayment penalty on your loan is too high. Under the Truth in Lending Act, lenders must disclose any prepayment penalty and how it is determined. If the lender says there is no prepayment penalty, there should be a statement to that effect in the documents. You should ask the lender to show you where that is stated in the documents.
- Do any of the loan terms differ from what was previously discussed or provided? If yes, which terms and why?
Review documents prior to signing them and make sure you understand why any changes in terms and conditions have been made.
Source: Federal Deposit Insurance Corporation at 550 17th Street NW Washington, D.C. 20429-9990; 877-ASKFDIC; 877-275-3342.