How to understand complicated loan requirements
Who hasn’t rushed through documents dense with legalese, like the consent forms required by many websites?
Sometimes it may be no big deal to skim and click “I Accept.”
But if there’s one lesson from the mortgage mess that’s affected millions of homeowners, it’s that you’d better understand the terms before signing for a mortgage, says Jessica Choplin, associate professor of psychology at DePaul University, Chicago.
For the past three years, Choplin and her colleagues have been studying how well consumers comprehend existing mortgage forms and proposed new ones.
All the forms tested were for “adjustable rate mortgages,” whereby the interest rate can rise under certain conditions.
Many consumers were unable to remember any key features disclosed in any of the documents, like whether there’s a “prepayment penalty” for paying off the loan early, or what the annual percentage rate is.
“People are often just oblivious,” she says.
To better comprehend a mortgage, Choplin offers these tips: Read the documents slowly; try to avoid distractions; and take the loan documents to a trusted financial adviser.
Borrowers should receive terms for their loan in a “Good Faith Estimate,” which must be provided within three days of making a mortgage application, says Jack Guttentag, who runs the website Mtgprofessor.com.
Unfortunately, “Many people may not have access to an adviser,” says Ira Rheingold, executive director of the National Association of Consumer Advocates.
Fortunately, most lenders have become more conservative, only making mortgages to those who can afford them, he says.
“But especially if you’re a first-time buyer or getting an adjustable rate mortgage, it would make sense to have a counselor” to help understand loan terms, Rheingold adds.
Non-profit housing counseling agencies providing free advice are listed at www.hud.gov, but counselors are often busy.
As a last resort, if you’re on your own, “Question anything that sounds too good,” Rheingold advises.
© CTW Features