Tips for Working with Lenders

• Get recommendations: Ask friends and family members for suggestions, especially if they've recently obtained a loan.
• Check credentials: Mortgage bankers are regulated by either your state's department of banking or division of real estate. Check with the one appropriate to your state to see if a lender is in good professional standing. Mortgage brokers may be state regulated or not. If not, check with the local chapter of the National Association of Mortgage Brokers or the Better Business Bureau to see if their record is clean.
• Do your homework: Learn about typical mortgages and ask questions when something looks amiss; a broker may be trying to pad closing costs or other fees at your expense.
• Take care online: There are plenty of attractive deals online, but first make sure you're dealing with a reliable broker or lender.

If you're working with a broker, the National Consumer Law Center recommends you demand to know how much the broker is making from the lender as well as from any fees you might be paying. It's best to get this information upfront and in writing. Avoid a broker who is double-dipping-getting a fat premium from the lender, as well as fees from you.

The Real Estate Settlement Procedures Act (RESPA) requires lenders to give you information on all closing costs and escrow account practices. Any business relationships between the lender and closing service providers or other parties to the transaction must also be disclosed. Many of the fees are negotiable. More information is available from the Federal Trade Commission, the Federal Reserve Board, and the Department of Housing and Urban Development.

Question to Ask When Shopping for a Mortgage

When shopping for a home mortgage make sure you obtain all the relevant information:

• Research current interest rates. Check the real estate section of your local newspaper, use the Internet, or call at least six lenders for information.
• Check the rates for 30-year, 20-year and 15-year mortgages. You may be able to save thousands of dollars in interest charges by getting the shortest-term mortgage you can afford.
• Ask for details on the same loan amount, loan term, and type of loan from multiple lenders so that you can compare the information. Be sure to get the Annual Percentage Rate (APR), which takes into account not only the interest rate but also points, broker fees, and other credit charges expressed as a yearly rate.
• Ask whether the rate is fixed or adjustable. The interest rate on adjustable rate mortgage loans (ARMs) can vary a great deal over the lifetime of the mortgage. An increase of several percentage points might raise payments by hundreds of dollars per month.
• If a loan has an adjustable rate, ask when and how the rate and loan payment could change.
• Find out how much down payment is required. Some lenders require 20% of the home's purchase price as a down payment. But many lenders now offer loans that require less. In these cases, you may be required to purchase private mortgage insurance (PMI) to protect the lender if you fall behind on payments.
• If PMI is required, ask what the total cost of the insurance will be. How much will the monthly mortgage payment be when the PMI premium is added and how long you will be required to carry PMI?
• Ask if you can pay off the loan early and if there is a penalty for doing so.

There is a long list of sources for mortgages loans: mortgage banks, mortgage brokers, banks, thrifts and credit unions, home builders, real estate agencies and Internet lenders.

PEER-TO-PEER LOANS

Peer to peer lending (P2P), or social lending, is a new process of connecting an individual borrower with lenders, without using traditional banks to obtain an unsecured loan. As a potential borrower, you can post a request for a loan, along with a brief description of how you will use it. The borrower and lenders are strangers; their only knowledge of each other is through the P2P website. Although the idea seems very informal, a peer-to-peer loan contract is a formal, legally binding agreement between two parties; checks and pay stubs are required. There can still be fees for late and missed payments. The lenders must report your loan payment history to the credit reporting agencies.

Payday and Tax Refund Loans

Payday loans are illegal in some states. Recent changes in the law for payday lenders have also made payday loans illegal for members of the military. With a typical payday loan, you might write a personal check for $115 to borrow $100 for two weeks, until payday. The annual percentage rate (APR) in this example is 390 percent! If you can repay the loan quickly, it may not appear such a bad deal. But if you can't pay off the loan quickly, that relatively small loan can grow into a large amount of debt. At 390 percent, a $100 loan will become $490 in a year and $2,401 in two years.

Another high cost way to borrow money is a tax refund loan. This type of credit lets you get an advance on a tax refund for a fee. APRs as high as 774% have been reported. If you are short of cash, avoid both of these loans by asking for more time to pay a bill or seeking a traditional loan. Even a cash advance on your credit card may cost less.

Installment Loans

Before you sign an agreement for a loan to buy a house, a car or other large purchase, make sure you fully understand all the lender's terms and conditions, including:

• The dollar amount you are borrowing.
• The payment amounts and when they are due.
• The total finance charge, the total of all the interest and fees you must pay to get the loan.
• The Annual Percentage Rate (APR), the rate of interest you will pay over the full term of the loan.
• Penalties for late payments.
• What the lender will do if you can't pay back the loan.
• Penalties if you pay the loan back early

The Truth in Lending Act requires lenders to give you this information so you can compare different offers.

Home-Equity Loans

A home equity loan could be a smart way to pay off high-interest debt or pay for home repairs. But consider carefully before taking out a home equity loan. If you are unable to make payments on time, you could lose your home.

Home equity loans can either be a revolving line of credit or a lump sum. Revolving credit lets you withdraw funds when you need them. A lump sum is a one-time closed-end loan, for a particular purpose, such as remodeling or tuition. Apply for a home equity loan through a bank or credit union first. These loans are likely to cost less than those offered by finance companies.

Types of Loans

There are different types of loans. Some are secured loans. This mean that your property and things you own are used as collateral, and if you cannot pay back the loan, the lender will take your collateral to get their money back. Other types of loans, unsecured loans, don’t use property as collateral. Lenders consider these as more risky than secured loans, so they charge a higher interest rate for them. Most credit cards are unsecured loans, although some consumers have secured credit cards. Two very common secured loans are home equity and installment loans.