Confused About Mortgages? You’re Not Alone

July 31, 2009 · Posted in News For Homebuyers

Another government agency? No way!

Before you groan about more regulation, please read this recent article in the New Yorker titled “Caveat Mortgagor.” It was an excellent piece that explained the proposed Consumer Financial Protection Agency, an Obama Administration plan designed to regulate consumer financial products, which would hopefully prevent another Wall Street meltdown that also caused a Main Street meltdown.

The article made some compelling arguments and offered examples of other federal regulations that were put in place to save consumers from danger and death (e.g., “Food, Drug, and Cosmetic Act,” and “Meat Inspection and the Pure Food and Drugs Acts“).

Death from mortgages?

C’mon! How can a consumer die from a bad mortgage? Unfortunately, it has happened — perhaps indirectly as a result of a mortgage the borrower couldn’t handle, but it did happen. There was the Pasadena woman who took her life when faced with foreclosure and then the unforgettable national story of 91-year-old Addie Polk who tried to take her life when she learned she would lose her home to foreclosure. Two sad stories of which there are probably many more.

Mortgages just plain confusing

What was most striking about the Caveat Mortgagor article was how many people are just plain befuddled when it comes to mortgages and finances. Federal Reserve economists Brian Bucks and Karen Pence issued a paper “Do Homeowners Know Their House Values and Mortgage Terms?” and wrote:

In particular, borrowers appear to underestimate the amount by which their interest rates can change. … borrower confusion also appears to be a factor, as a sizable number of adjustable-rate borrowers report that they do not know the terms of their contracts.

The FTC turned out an executive summary “Improving Consumer Mortgage Disclosures” in 2007 that concluded:

If consumers do not understand the costs and terms of their mortgages, they may pay more for their mortgages than necessary, obtain inappropriate loan terms, fall prey to deceptive
lending practices, and experience unpleasant surprises and financial difficulties during the course of their loans.

And lastly, back in 2003, economist Susan Woodward wrote a paper “Consumer Confusion in the Mortgage Market.” Even though it was written six years ago, all of the same issues are still apparent now: Buying a home and getting a mortgage is complex, the language is difficult, and shopping for a mortgage is not easy.

Do you know the True Cost of your loan?

While we can’t change the actual language used in the mortgages world (an ARM is an ARM is an ARM), we can try to make it easier to shop for a mortgage. That’s why a few weeks ago, Zillow Mortgage Marketplace rolled out True Cost Calculation, which is an apples-to-apples comparison of mortgage quotes. True Cost is the sum total borrowers will pay in interest and fees during the expected time they plan to keep the loan. So, if you think you will stay in a home for five years before moving, you can see how much you will pay for that entire time.

Read more about how True Cost Calculation works. Better yet, look at the graph below to see it displayed.