In a recent a recent Zillow Mortgage survey a staggering number of home buyers demonstrated the lack of basic knowledge concerning home mortgages. When queried regarding mortgage basics, nearly half of the survey participants – 46 percent – did not know the correct answers about mortgage fundamentals. In fact, 44 percent admitted they are not confident in their knowledge of mortgages or the mortgage process.
57 percent of prospective home buyers who were polled do not understand how adjustable rate mortgages (ARMs) work. When asked if interest rates on 5/1 ARMs always reset higher after five years, the majority of home buyers answered yes. In fact, the interest rate will adjust to the prevailing rate after five years, even if rates have declined. Currently, many borrowers whose ARMs have recently reset have lower interest rates than they did when they took out the loan.
34 percent of the respondents who are prospective home buyers do not understand that lender fees are negotiable and that they vary by lender. They believe lenders are required by law to charge the same fees for credit reports and appraisals, when in fact home buyers can save money by shopping for the lowest fees.
Additional Survey Findings
• 45 percent of polled prospective home buyers believe that they should always buy mortgage discount points when obtaining a mortgage. However, because mortgage discount points are simply prepaid interest, the decision should depend on how long you intend to own the home. In some cases, you may not plan to remain in the house for long enough to break even after buying points.
• 55 percent of prospective home buyers in the study do not understand that mortgage rates vary throughout the day. In reality, mortgage rates can change rapidly, similar to how stock prices can change throughout the day. To get the optimum rate, it is important to monitor rates closely.
• 37 percent of prospective home buyers who were polled believe that pre-qualifying for a loan means they have secured financing. In fact, “pre-qualification” is used to describe the earliest step in the process when a lender approximates how much you can afford, performs a credit check, but does not request any sort of documentation to verify the information you provide. Although there is not a reliable industry standard definition of pre-qualification, it is not until a lender has approved your loan application without conditions that you can rest assured that the lender has committed to financing your loan.
• 42 percent of the polled prospective home buyers did not understand that Federal Housing Administration (FHA) loans are available to ALL buyers. Instead, they believe only first-time buyers qualify. FHA loans can cost less for many buyers, including repeat buyers with low to average credit scores and with down payments of less than 20 percent. FHA loans can provide many prospective home buyers the opportunity to achieve their goal of home ownership.
Your best plan of action for getting a better understanding of mortgage facts is to meet with a Realtor who can explain the basics and then put you in touch with a mortgage lender who can guide you through the mortgage process. There is much to gain by being an informed buyer.
