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Mortgage maze still leaves home buyers in a haze

by Broderick Perkins

(5/4/2011) It's not just that credit is tight and incomes are light.

After years of overhauling the mortgage industry with reams of regulatory bans, counseling mandates, prohibitions and disclosures, too many home buyers still don't have a clue about home loans.

Zillow Mortgage Marketplace, with Ipsos, surveyed prospective home buyers, asking them about their knowledge of mortgages and mortgage facts.

They barely got a passing grade.

Forty-four percent admitted they aren't confident in their mortgage knowledge or the mortgage process.

The surveyed group also answered basic questions about mortgage information wrong 46 percent of the time.

After years of similar studies it appears that mortgage maze confusion remains chronic.

Both produced almost a half decade ago, the AFL-CIO-commissioned "Homeowners Confused, Worried About ARMs (adjustable rate mortgages)" and BankRate.com's "Mortgage Ignorance Rampant," reveal how American's have had a love-hate relationship with mortgages for years.

Earlier this year, a Move.com survey found consumers frustrated and confused about the mortgage process.

Zillow reveals people remain mystified and distrustful of the mortgage industry and that's not helping the pallid home buying market.

"Most people wouldn't jump out of a plane if they didn't know how to use a parachute, yet each year many buyers commit to the largest loan they will take out in their lifetimes without understanding essential information about mortgages," said Zillow Mortgage Marketplace Director, Erin Lantz.

Zillow found:

• More than half (57 percent) of prospective home buyers who were polled did not understand how adjustable rate mortgages (ARMs) work. The majority of home buyers believe ARM rates always reset higher after five years. In reality, interest rates adjust to the prevailing rate after five years, as they've done recently for those who purchased with 5/1 ARMs five years ago, according to Erate.com.

• One-third (34 percent) of those surveyed, who were prospective home buyers, did not understand that lender fees are negotiable and that they vary by lender. They believed lenders are required by law to charge the same fees for credit reports and appraisals. Home buyers can shop around for the best fees.

• Nearly half (45 percent) of polled prospective home buyers believe that they should always buy mortgage discount points when obtaining a mortgage. Not necessarily. Mortgage discount points are prepaid interest. The decision to buy them should depend on how long you intend to own the home. You might not remain in the house long enough to break even after buying points, Zillow explained.

• More than half (55 percent) of prospective home buyers in the study did not understand that mortgage rates vary throughout the day. Mortgage rates can change rapidly, similar to stock market prices, according to Zillow. Shop around for rates and keep in touch with your lender.

• More than one-third (37 percent) of prospective home buyers who were polled said that pre-qualifying for a loan means they have secured financing. "Pre-qualification" is only the earliest step in the mortgage application process. It's when a lender approximates how much you can afford, but may not run your credit or examine documentation to verify your information. Only after the lender has approved your loan application -- without condition -- can you be sure the lender is committed to making the loan.

• More than two in five (42 percent) of the polled prospective home buyers did not understand that Federal Housing Administration (FHA) loans are available to all buyers. Instead, they believe only first-time buyers qualify. FHA loans, the subprime better-idea, have become more difficult to obtain, but they can cost less for many buyers, including repeat buyers with low to average credit scores and with down payments of less than 20 percent.

"By simply spending a few hours researching how a mortgage works, and by shopping around for the most competitive rates and fees, buyers can save a lot of money," Zillow's Lance said.

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