When you first get your home loan documents, they look pretty scary. Long, generally full of legal gibberish that can send you to sleep in five minutes flat - the last thing you probably want to do is sit and read them!
But understanding your mortgage documents is crucial if you don't want to get yourself into trouble down the track. If you can't understand them by yourself, get a legal professional, knowledgeable friend or your mortgage broker to help you. Ask lots of questions!
Some of the main clauses you need to look for are outlined below. The annoying part is that almost every loan document uses different names for the same thing, but if you understand roughly what you're looking for, hopefully you can find if any of these are included in your mortgage. Then you can make sure you understand the consequences of those clauses.
Balloon payment - this is one you definitely need to check for in your fine print. A balloon payment happens when you either make interest only payments on your loan, or perhaps reduced payments, then at the end of the loan term you pay off a final lump sum. While lower payments may sound great, the reality is that you're paying a lot less off the principal of your loan. So at the end of the loan term you may still have a substantial loan balance, and you will have to run around and get another mortgage to pay it out. If your circumstances have changed, and you have trouble getting a loan, you may end up losing your home.
Note - it's amazing how many tricky things get hidden in the fine print under "note". Notes usually contain clarification or extra terms. For example, if you haven't paid your repayment within a certain number of days of the due date, the lender may have the right to sell your home. It may also give the bank the right to take any of your assets if you do not make your payment. Make sure you're very clear about ALL of the rights the lender has if you miss a payment.
Notice - this section is also very important if you miss a payment or are running late. Some lenders will give you notice that you've missed a payment and outline the steps they will take if the payment isn't made within a certain time period. Others, however, will not give you any notice, and the last thing you want is to get a letter in the mail telling you they're selling your home. Always be sure to have payments ready to be paid while you're on holiday, or make arrangements if you're ill or incapacitated. Send it early if you can, so you don't have to worry about missing the payment. Check to make sure the lender will give you time to make up the missed payment, or whether it will commence foreclosure proceedings immediately.
Acceleration - this clause exists in most loans in some form, and mostly it's never used. But you need to know if it's there, and what it means. Basically, this clause gives the lender the right to bring forward the time when your loan is due, and allows them to ask straight away for the full amount remaining of your loan, if you miss a payment. This may mean you suddenly find yourself having to find another home loan, quite often at the worst possible time. After all, if you're missing loan payments, chances are you're missing other payments as well. Make sure you understand how much notice the lender has to give you in this situation, if any.
Extra fees - I sometimes think lenders have a whole department devoted to coming up with new and ingenious fees to charge borrowers. I've copped a few of these in my time, because I didn't read the fine print thoroughly enough. It still bugs me that I pay $250 a year as a "package review fee" on one loan - and I don't think the lender has ever reviewed my loan once.
This one may seem a bit obvious - but confirm that what you're signing is what you agreed upon. Check the various fees, interest rates, loan term etc. I've had loan documents turn up where the interest rate was a standard rate, and yet I'd negotiated a much better rate because I'd taken out 3 loans at the same time. So mistakes happen - and if you don't fix them at the document stage, it will be a lot harder to change them later.
In the end, reading mortgage documents is probably nobody's idea of a fun time. However you should never sign any document you don't understand. Take as long as you need to make sure the documents make sense, and that you understand what happens if you mess up on your payments. Always ask questions - the only silly questions are the ones you don't ask. And never be afraid to ask for help from a professional. Spending a few hundred dollars getting your legal professional to review the documents and explain them clearly to you may be the best money you spend when buying your home. In the excitement of buying your dream home the fine print in your home loan documents can seem unimportant, but in the long run it may just be the most important part of the process.
To find out more about choosing the right home loan, check out Home Loan Zone Central