Nearly Half of Home Buyers Surveyed Don't Understand Essential Information about Mortgages
Misinformation about Interest Rates, Lender Fees and FHA Loans Can Lead Buyers to Make Costly Mistakes, According to Zillow Mortgage Marketplace Survey
May 3, 2011
SEATTLE, May 3, 2011 /PRNewswire/ -- As the housing market continues to struggle with high inventory and a lack of demand, home buyers appear ill-prepared to take out a mortgage, answering basic questions about mortgage information wrong nearly half (46 percent) of the time (i) according to a Zillow Mortgage Marketplace survey(ii). In fact, 44 percent admitted they are not confident in their knowledge of mortgages or the mortgage process. Zillow® Mortgage Marketplace, with Ipsos, surveyed prospective home buyers, asking them to gauge their own knowledge of mortgages, and asking basic questions about mortgage facts.
For example, more than half (57 percent) of prospective home buyers who were polled do not understand how adjustable rate mortgages (ARMs) work. When asked if interest rates on 5/1 ARMs always reset higher after five years, the majority of home buyers answered yes. In fact, the interest rate will adjust to the prevailing rate after five years, even if rates have declined(iii). Currently, many borrowers whose ARMs have recently reset have lower interest rates than they did when they took out the loan.
Additionally, one-third (34 percent) of the respondents who are prospective home buyers do not understand that lender fees are negotiable and that they vary by lender. They believe lenders are required by law to charge the same fees for credit reports and appraisals, when in fact home buyers can save money by shopping for the lowest fees.
"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. "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."
Additional Survey Findings
- Nearly half (45 percent) of polled prospective home buyers believe that they should always buy mortgage discount points when obtaining a mortgage. However, because mortgage discount points are simply prepaid interest, the decision should depend on how long you intend to own the home. In some cases, you may not plan to remain in the house for long enough to break even after buying points.
- More than half (55 percent) of prospective home buyers in the study do not understand that mortgage rates vary throughout the day. In reality, mortgage rates can change rapidly, similar to how stock prices can change throughout the day. To get the optimum rate, it is important to monitor rates and shop around.
- More than one-third (37 percent) of prospective home buyers who were polled believe that pre-qualifying for a loan means they have secured financing. In fact, "pre-qualification" is used to describe the earliest step in the process when a lender approximates how much you can afford, but does not run your credit or request any sort of documentation to verify the information you provide. Although there is not a reliable industry standard definition of pre-qualification, it is not until a lender has approved your loan application without conditions that you can rest assured that the lender has committed to financing your loan.
- More than two in five (42 percent) of the polled prospective home buyers do not understand that Federal Housing Administration (FHA) loans are available to ALL buyers. Instead, they believe only first-time buyers qualify. FHA loans can cost less for many buyers, including repeat buyers with low to average credit scores and with down payments of less than 20 percent.
Interactive Online Quiz and Resources Available
An online version of the Zillow Mortgage Marketplace survey, the "Mortgage IQ Quiz," is available at www.zillow.com/mortgage/quiz/ and contains the correct answers and detailed explanations to each question. Following the quiz, participants are given a score and resources to learn more about mortgages and the mortgage process.
About Zillow® Mortgage Marketplace
Zillow Mortgage Marketplace, operated by Zillow, Inc., is a free, open, and transparent lending marketplace, where borrowers connect with lenders to find loans and get the best mortgage rates. Borrowers anonymously submit loan requests and receive an unlimited number of custom mortgage quotes with real rates directly from thousands of competing lenders. Zillow Mortgage Marketplace also provides mortgage calculators, mortgage advice, mortgage widgets, and lender directories.
Zillow is a registered trademark of Zillow, Inc.
Ipsos is a leading global survey-based market research company, owned and managed by research professionals. Ipsos helps interpret, simulate, and anticipate the needs and responses of consumers, customers, and citizens around the world.
Ipsos has a full line of custom, syndicated, omnibus, panel, and online research products and services, guided by industry experts and bolstered by advanced analytics and methodologies. The company was founded in 1975 and has been publicly traded since 1999. In 2010, Ipsos generated global revenues of euro 1.140 billion ($1.6 billion U.S.).
Visit www.ipsos-na.com to learn more about Ipsos offerings and capabilities.
(i) The percent of home buyers who incorrectly answered the survey questions was calculated by averaging the percentages of buyers who incorrectly answered True or False to eight statements on general mortgage topics.
(ii) These are some of the findings of an Ipsos poll conducted April 13-15, 2011. For the survey, a nationally representative sample of 1,005 randomly-selected adults aged 18 and over residing in the U.S. was interviewed via Ipsos' U.S. online omnibus. With a sample of this size, the results are considered accurate within +/-3.1 percentage points 19 times out of 20, of what they would have been had the entire population of adults in the U.S. been polled. The margin of error will be larger within subgroupings of the survey population. The subgroup of prospective home buyers in the sample is 168, which has a margin of error of +/-7.6. These data were weighted to ensure the sample's regional and age/gender composition reflects that of the actual U.S. population according to data from the U.S. Census Bureau. All sample surveys and polls may be subject to other sources of error, including, but not limited to coverage error, and measurement error.
(iii) The interest rate on an ARM is made up of two parts – the margin and the index. The margin is a fixed percentage that lenders add to the index. Combined, the margin and index are called the fully indexed rate. The margin can vary between lenders and loan products, but it is usually constant over the life of a loan. Unlike the margin, the index fluctuates and is typically what dictates the interest rate a borrower will pay. If after five years, the index on a loan has gone down, the fully indexed rate could actually decrease. However, it is most common for the index to increase after five years, therefore increasing an interest rate.
SOURCE Zillow Mortgage Marketplace