two-year adjustable rate mortgage with a prepayment penalty that lasts up to 36 months, after the 24-month fixed period, the loan may adjust to a higher rate.” If you wanted to refinance or pay off the loan after the fixed period, there may be a prepayment penalty that could cost up to six months worth of interest. Ballentine explains how a balloon payment works: “After a given time period at a particular rate, the entire remaining amount becomes due on the loan.” Problems arise when the homebuyer is unaware that their loan has a balloon clause and finds him or herself unable to make the final payment.
Understand your credit file. About 80% of Americans have false information on their credit reports, says Scott. Before you apply for any loan, obtain and review your credit report. If you find mistakes, fix them yourself by alerting the credit reporting agencies. An unfavorable credit situation can lead to unfair terms, explains Scott.
Protecting yourself from a bad loan requires diligence. Ballentine says that if you don’t understand any part of the loan agreement, don’t sign! The law allows you to cancel a loan within three days for any reason. For more information, read American Nightmare: Predatory Lending and the Foreclosure of the American Dream by Richard Lord (Common Courage Press; $18.95)