Understanding Mortgages: Avoid Costly Home Buyers’ Mistakes
The tax breaks and sense of security you get from owning a home will continue well into this century, despite the recent mortgage and foreclosure crisis. Understanding mortgages is essential to making sure you can reap the benefits of your home, instead of falling into foreclosure. Yet many home buyers continue to be ill-prepared to take out a mortgage, according to a Zillow Mortgage® Marketplace survey.
Zillow, along with Ipsos, global survey-based market research company, surveyed prospective home buyers asking them to gauge their own understanding of mortgages, and asking basic questions about mortgage facts. According to the survey, home buyers answer basic mortgage information questions wrong nearly 50 percent of the time. Forty-four admit they are not confident about their knowledge of mortgages or 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, director of Zillow Mortgage Marketplace. She adds that just a few hours researching how a mortgage works, and by shopping around for the most competitive rates and fees can save home buyers a lot of money.”
Zillow offers some insight that can make understanding mortgages less daunting for home buyers and that will also spare real estate rookies costly first mortgage mistakes:
• Adjustable Rate Mortgages. Fifty-seven percent of respondents did not understand how adjustable rate mortgages work. When asked if interest rates on 5/1 ARMs always reset higher after five years, the majority of home buyers answered yes. In reality, the interest rate will adjust to the prevailing rate after five years, even if rates have declined. Many borrowers whose ARMs have recently reset have lower interest rates than they did when they took out the loan.
• Mortgage Lender’s Fees. About one-third of the respondents who are prospective home buyers do not understand that lender fees are negotiable and vary by lender. They believe lenders are legally obligated to charge the same fees for credit reports and appraisals. In fact, home buyers can save money by shopping around for the lowest fees.
• Mortgage Discount Points. Forty-five percent believe that they should always buy mortgage discount points when getting a mortgage. However, because mortgage discount points are simply prepaid interest, the decision should be based 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.
• Mortgage Rate Changes. In another area in which mortgage understanding was lacking, 55 percent of prospective home buyers did not know 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 and shop around.
• Mortgage Prequalification. More than one-third of prospective home buyers believe that pre-qualifying for a loan means they have secured financing. “Pre-qualification” is simply the earliest step in the mortgage process when a lender estimates how much you can afford, but does not check your credit or request any sort of documentation to verify the information you provide. Although there is not a reliable industry standard definition of pre-qualification. Only when a lender has approved your loan application without conditions can you rest assured that the lender has committed to financing your mortgage.
For information about how to get a mortgage in Canada, visit the Canadian Mortgage and Housing Corporation.
You can check out an online version of the Zillow Mortgage Marketplace survey, the “Mortgage IQ Quiz”. It provides correct answers and detailed explanations to make understanding mortgages easier for prospective homebuyers. On completion of the quiz, you’ll be given a score and resources to learn more about mortgages and the mortgage process. Just spending an hour or so can you help avoid first mortgage mistakes that will cost you big in the future.