Confusion Seen Over Mortgage Basics

A mortgage may be the biggest financial decision a consumer will make in his or her life, but roughly half of adult Americans lack a basic understanding of mortgage fundamentals, according to a recent Zillow survey.

Adults surveyed incorrectly answered basic questions about how mortgages work 46 percent of the time, including questions about interest rates, points and adjustable rate mortgages (ARMs). A nearly equal number said they were unsure about their own knowledge of home loans and the mortgage process."Most people wouldn't jump out of a plane if they didn't know how to use a parachute, yet each year many buyers commit to the largest loan they will take out in their lifetimes without understanding essential information about mortgages," said Erin Lantz, marketing director for Zillow. "By simply spending a few hours researching how a mortgage works, and by shopping around for the most competitive rates and fees, buyers can save a lot of money."Nearly half of all respondents (45 percent) said they thought it was always a good idea to pay for discount points when taking out a mortgage, when in fact buying points doesn’t make sense if you’re only going to own the home for a few years. Over one-third (37 percent) thought that pre-qualifying for a mortgage meant a guarantee of financing, rather than an initial estimate of what they may be able to borrow.Roughly one-third also thought that lenders are required by law to charge uniform rates for fees and appraisals, and did not realize such fees are negotiable and can vary from lender to lender.About two-fifths (42 percent) thought that FHA mortgages are limited to first-time buyers only, rather than being available to repeat buyers as well.Some of the biggest confusion surrounded ARMs, where a majority of potential borrowers said interest rates always increase when the loan resets, typically after five years for the most common type of ARM. In reality, ARM rates can sometimes go down when they reset, depending on what prevailing interest rates are at that time.A majority also did not understand that mortgage rates vary throughout the day, and the rate you get can depend on what time you lock it in. Fifty-five percent of survey respondents thought rates were set once a day.The survey of over 1,000 randomly selected adults was conducted in mid-April.