The Mortgage Fine Print
Buying a home can be an overwhelming process, especially for first-timers or those who haven’t had much experience with securing a mortgage. Even the most financially savvy buyers are in danger of overlooking the mortgage fine print after becoming emotionally connected to their “dream home.” That “connection” is potentially financially dangerous.
A new academic study, reported on last week by Chicago Tribune ‘Homefront’ reporter Mary Ellen Podmolik, found that, when presented with financial documents, people’s eyes focus more closely on the language that is easiest to understand while glossing over the more complicated information. For example, a homeowner may decide on an adjustable-rate mortgage (ARM) after eyeing the initial low monthly payment, never fully realizing that the interest rate reset will result in a higher payment a few years down the road. An ARM reset, coupled with an unforeseen job loss or wage reduction, could challenge a homeowner’s ability to make their mortgage payment. This was the unfortunate scenario that put many homeowners in danger of losing their homes over the last few years.
The academics behind the study suggest that homeowners be required to pass a financial literary test before securing a mortgage – those who fail the test would then be required to undergo housing counseling. Counseling prior to taking out a mortgage, otherwise known as pre-purchase counseling and education, has proven to be an effective tool in preparing people for homeownership; in fact, a recent study found that those who completed pre-purchase counseling and education are one-third less likely to become seriously delinquent on their mortgage within two years of the loan origination. Similarly, another recent study from Freddie Mac found that pre-purchase financial counseling may reduce the delinquency rate of first-time homebuyers by an average of 29 percent.
These two studies, together with the newly released academic study, illuminate a greater need to help homebuyers understand the terms of a mortgage before they sign the dotted line. With this in mind, HPF urges all prospective homebuyers to do the homework and research they need to make the most appropriate mortgage decision in order to achieve sustainable homeownership.