SEATTLE â€“ May 4, 2011 â€“ A survey conducted by Zillow.com finds that many prospective homebuyers donâ€™t understand even basic information about mortgages, relying heavily on advice from lenders.
Fairly simple mortgage questions were answered incorrectly almost half (46 percent) the time according to a Zillow Mortgage Marketplace survey; and 44 percent admitted theyâ€™re not confident in their knowledge of mortgages or the mortgage process.
For example, 57 percent of prospective homebuyers polled donâ€™t 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 homebuyers answered yes. However, an ARM interest rate will adjust to the prevailing rate after five years and in could even go lower. Currently, many borrowers whose ARMs have recently reset have lower interest rates than they did when they took out the loan.
Additionally, one-third (34 percent) of prospective homebuyers donâ€™t understand that lender fees are negotiable and that they vary by lender. They mistakenly believe lenders are required by law to charge the same fees for credit reports and appraisals. Consequently, they donâ€™t shop around for lower fees.
â€œMost people wouldnâ€™t jump out of a plane if they didnâ€™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,â€ says Zillow Mortgage Marketplace Director Erin Lantz. â€œBy simply spending a few hours researching how a mortgage works and shopping around for the most competitive rates and fees, buyers can save a lot of money.â€
Additional findings from prospective home buyers polled:
â€¢ Nearly half (45 percent) 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 the borrower intends to own the home. In some cases, they may not stay in the house long enough to break even.
â€¢ More than half (55 percent) do not understand that mortgage rates vary throughout the day, similar to how stock prices can change throughout the day. To get the optimum rate, itâ€™s important to monitor rates and shop around.
â€¢ More than one-third (37 percent) believe that pre-qualifying for a loan means they have secured financing. But â€œpre-qualificationâ€ describes the earliest step in the process when a lender approximates how much a borrower can afford â€“ but doesnâ€™t run a credit report or request any documentation to verify the information. Although there is not a reliable industry standard definition of pre-qualification, financing is never secured until a lender approves a loan application without conditions.
â€¢ More than two in five (42 percent) do 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 downpayments less than 20 percent.