“Even well-educated people have trouble figuring it out.”

From the LA Times:

Loan data proves baffling to many, FTC says

If you were confused by the disclosure forms your mortgage lender gave you, you’re far from alone, according to the Federal Trade Commission, which says the industry can do a better job.

A study released Wednesday by the agency found that the required disclosures were ineffective at explaining the costs and risks of home loans.

“Mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, and they do not address the variety and complexity of today’s mortgage products,” FTC Chairman Deborah Platt Majoras said in a statement. .

The issue is timely. In the wake of the housing market’s boom and subsequent slowdown, as well as the meltdown in sub-prime mortgages, many homeowners have said they didn’t understand the terms of the loans they took out.
…
In the FTC study, more than 800 recent mortgage customers were each given disclosure forms for a hypothetical loan. About half got forms of the type currently used. The rest got prototype forms designed by the study authors to be understandable.

The study found that when given the disclosures now used:

• Half the borrowers couldn’t correctly identify the loan amount.

• Nine in 10 couldn’t figure out the total upfront cost of the loan.

• Two-thirds did not recognize that they would have to pay a penalty if they paid off the mortgage within two years. And 95% didn’t know how much that penalty would be.

• Three-quarters did not know when substantial charges for credit insurance had been included in the loan.

• One in five couldn’t correctly identify the annual percentage rate, the amount of cash due at closing or the monthly payment — or whether that payment included charges for property taxes and insurance.

The study’s authors said they chose the best disclosures they could find. In other words, many forms used by lenders were less readable than the ones used in the study. Also, the study looked only at fixed-rate loans. Disclosures for adjustable mortgages might be even more confusing.