Flickr / Mark Moz.
In the spring of 2008, Bankrate.com found that 26% of homeowners polled had no idea what kind of mortgage they owned. As bad as that sounds, it was a definite improvement from the year before, when a stunning 34% reported ignorance on that particular subject.
That's not surprising, you may think, considering the subprime meltdown that began at that time – a product of, at least partly, borrowers' lack of understanding of the mortgage loans they were obtaining.
With all the attention focused upon the issue, you might expect things would have improved by early 2011, but this did not seem to be the case. The National Foundation for Credit Counseling revealed in its report that year that fully 29% of adults said that their mortgage terms were actually different from what they had believed.
Financial illiteracy is a huge problem
Unfortunately, things don't seem to be getting a whole lot better. A survey last year by Zillow showed how little many home buyers understand about mortgage shopping: 24% thought that the bank of their choice would automatically offer them the lowest interest rates and fees, while 34% believed that the law dictated that all lenders charge the same fees for credit reports and appraisals.
Synergistics Research released a survey early this year showing that, although those who have had a mortgage in the past are more knowledgeable than first-time buyers, consumers are still at a loss when it comes to some very basic concepts.
For example, more than half of all respondents did not have a firm understanding of mortgage payment features, such as prepayment penalties and late fees – or, astoundingly, the date each month upon which their mortgage payment was due.
The underlying problem appears to be a general lack of financial literacy, something that is not specific to the U.S. A study published last year by the George Washington University School of Business asked people all over the world these three questions, then gauged the responses:
1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
More than $102; Exactly $102; Less than $102; Do not know; Refuse to answer
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
More than today; Exactly the same; Less than today; Do not know; Refuse to answer
3. Please tell me whether this statement is true or false: "Buying a single company's stock usually provides a safer return than a stock mutual fund."
True; False; Do not know; Refuse to answer
The percentage of persons answering all three questions correctly was 30% for the U.S., compared to 53% for Germany, and 45% for the Netherlands. Japan's percentage was the lowest, at 27%.
More education is sorely needed
Providing prospective home buyers with some pertinent information prior to choosing a mortgage would be an immense help, and some states offer such programs. The Federal Housing Administration, which insures loans for borrowers of limited means, has developed an educational program of its own, which may be available by the end of the year.
The Homeowners Armed with Knowledge program is designed to lessen taxpayers' risk of loan default by educating borrowers about home ownership, both before and after they obtain a mortgage. Completing the program will cut borrowers' mortgage insurance costs by approximately $325 annually, with more savings after two years of timely payments.
There is little doubt that more of these types of home buyer programs are needed, and not just for first-time buyers. As for future generations of prospective home owners, some general coursework teaching financial literacy in our nation's schools wouldn't be a bad idea, either.
