So you’re about to buy your first home and you’ve been reading up on all the things you need to remember: Make your offer conditional upon a home inspection, get pre-approved for a mortgage, mail out change of address forms . . . Wait a minute -- Back up! Did you read all of the fine print that came with your mortgage offer? Better yet, did you understand it?
A recent study of mortgage disclosure forms for the Federal Trade Commission (FTC) concluded that many borrowers don’t understand key items in the forms provided by lenders and have “significant misunderstandings about the terms of their recently obtained loans.”
Sure that rate you’re offered may sound great now. But if it’s for an adjustable rate mortgage (ARM) how long will it be before the rate may be adjusted upwards? If you decide to refinance within the next couple of years, are you going to be hit with a substantial prepayment penalty?
The recent meltdown in the sub-prime mortgage market has highlighted how serious it can be when borrowers don’t fully understand the terms of their loans. Many homeowners, who took out non-conventional mortgages that provided them with low initial payments, are suddenly finding themselves unable to cover their higher monthly debt obligations when their mortgages reset. Sadly, many are even finding themselves facing foreclosure.
Lenders are required by federal law to provide consumers with “truth-in-lending” and “good-faith-estimate” disclosures that outline the various costs and terms of their mortgages. The problem is these forms, designed over 30 years ago, don’t seem to explain in simple enough language key mortgage costs and terms.
In an attempt to find out more about this problem, the Federal Trade Commission (FTC) recently conducted a study of over 800 mortgage customers. Half were given today’s standard loan disclosure forms and the other half were given a prototype of a simplified disclosure form. The result was a significant increase in understanding among those given the prototype: Eighty percent of those provided with the new form were able to answer 70 percent or more of the questions about their mortgages correctly, compared to only 29 percent of those given the current forms.
In summary, the study shows that better disclosures are needed to help borrowers recognize true mortgage costs and avoid potentially deceptive lending practices. But, until the federally mandated disclosures are revised, it’s buyer beware! Don’t sign for a loan until you’re sure you have a thorough understanding of all of its terms, payments and potential penalties. And be sure to ask your lender to explain anything that isn’t clear.
Shopping for a home can be exciting, but financing a home is not something to be rushed into lightly. Taking time to ensure you choose a mortgage that has terms you’re comfortable with will provide you with the protection you need in the years to come.
Published on July 26, 2007