Why Mortgages Baffle Borrowers

A long-suspected fact about consumers has now been proven:

We don’t really understand mortgages.

A recent Zillow survey shows that potential buyers are misinformed about several key parts of the mortgage process.34 percent of first-time homebuyers aren’t aware it’s possible to get a home loan with a down payment of less than 5 percent

• 26 percent of buyers incorrectly believe they are obligated to close their loan with the lender that pre-approves them
• One in five homeowners don’t believe it’s possible to refinance an underwater mortgage
• 24 percent of homebuyers incorrectly believe the best rates and fees can always be found through their current bank

Scary, but not too surprising. Especially when you consider these four simple reasons consumers don’t understand mortgages:

Reason 1: Mortgages aren’t that interesting.

Let’s face it: There’s a lot of cool stuff going on in the world. The finer points of interest rates, origination fees and yield spread premiums are lost on buyers who simply want their keys (now).

Why consumers need to take interest: At the end of March, 1.68 million loans were in foreclosure, which amounts to 3.4 percent of all U.S. mortgages. A foreclosure can take 85-160 points off a credit score, remain on a credit report for seven years, and seriously harm a consumer’s odds of getting another loan or more credit.

With so much at stake, it’s critical to take interest in loan lingo. And not to be derailed by Reason 2:

Reason 2: Mortgages are confusing.

A home loan is not just a home loan. Mortgages vary by length of the loan, type of loan program, interest rates and fees (among many other factors).

With so many bells, whistles and options available on the home loan market, confusion can easily cloud a consumer’s vision. Just when potential buyers wrap their brains around the difference between a 30-year loan and a 15-year loan, up pops the discussion of discount points and lock fees.

Why consumers need to understand their options: Eliminating mortgage confusion helps consumers make informed decisions. Sifting through options with a thorough understanding gives buyers a clear conscience and the best odds of an appropriate home loan.

Reason 3: We think they don’t matter.

If we’re operating under the assumption that mortgages are boring and confusing, it’s pretty easy to see why consumers often say, “Eh, whatever our bank says is fine. It doesn’t matter.”

Why it does matter: Each mortgage option can have a drastic impact on a consumer’s finances. Take an adjustable-rate mortgage (ARM) for example. Choosing an ARM with a low introductory rate seems like a great idea in the early stages, but if the rate balloons, so will the mortgage payment.

Knowing the pros and cons associated with each mortgage feature helps consumers choose the right loan.

Reason 4: We don’t shop for mortgages that often.

Most folks shop for clothes several times a year. Groceries? Probably a few times a week.

But how often do you shop for a mortgage? Maybe once or twice in your life?

If practice makes perfect, it’s not hard to understand why most of us aren’t good at mortgage shopping. And knowing that we only have a few shots at mortgage success, it’s extremely important to make good decisions.

Why your only mortgage needs to be the right one: Changing the terms of an ill-fitting mortgage is a bit more complicated than returning a shirt. Refinancing involves fees, time and a successful appraisal. Get your mortgage correct the first time, and save yourself time, expense and effort.