From the Baltimore Sun:
With mortgage delinquencies and foreclosures soaring, federal researchers have identified a key contributing factor: Large numbers of consumers simply do not understand their own mortgages – especially subprime loans that come with complex features and costly penalties.
As a result, too many people are ill prepared to handle jolting payment increases and rate reset deadlines.
In a study involving 819 recent prime and subprime mortgage customers in 12 locations around the country, the Federal Trade Commission found that using current “truth-in-lending” and “good faith estimate” disclosures:
• Nearly nine out of 10 borrowers could not identify the correct amount of up-front charges connected with a loan.
• Four out of five had trouble understanding why the stated interest rate on the loan note was different from the “annual percentage rate” (APR) highlighted in the truth-in-lending disclosure.
• Two-thirds did not spot a potentially dangerous snare lurking in the loan – a substantial penalty if they refinanced within the first two years.
• Nearly a quarter could not correctly identify the total amount of settlement costs.
Equally troubling, borrowers often said they had no idea of their own loan costs or terms until they went to closing, “and some appeared to learn for the first time during the interview,” according to the FTC researchers.
Some of those borrowers said they had spent considerable time shopping and comparing rates before choosing their mortgage. But they still had problems understanding the disclosures they were provided.
Bottom line: “Current mortgage disclosures fail to convey key mortgage costs and terms to many consumers, leaving them susceptible” to bad deals, overcharges, loan payments that explode on them, and “deceptive lending practices,” according to the authors.
In the meantime, take this message to the application desk: Home loans are inherently complicated financial instruments. Demand that the loan officer walk you through every feature. And don’t sign up for a debt obligation tied to your house until you understand all its mechanics, payment scenarios, downside risks and costs.