Studies Show Most Home Buyers Do Not Understand Their Mortgages

By Stevie Duffin Updated on 9/25/2013

It seems American homebuyers don't understand how mortgages work.  As if the financial crisis itself wasn't evidence enough that something had gone foul in the mortgage marketplace, a recent study prepared and conducted by a major mortgage firm asked homebuyers to answer questions about how mortgage work and how to make sound financial decisions related to these instruments.

The results were startling.  Over half of all respondents revealed that they simply didn't understand some of the basic concepts involved in obtaining and optimizing a mortgage home loan.  Close to fifty percent of respondents indicated that they didn't understand how basic mortgage products, such as ARM loans, worked and were unable to explain such concepts as discount points or prequalification.

This highlights an issue that has long had an effect on the home buying population but that has gone unnoticed for some time until the recent financial crisis brought it out.  The issue?  Many homeowners simply don't know what they're doing when they purchase their homes.  More than this, it seems many homebuyers don't know what is best or ideal for them given their unique financial situations.   The financial crisis revealed the extent of the damage that this fundamental lack of knowledge had caused.

In the wake of the catastrophic economic events of the past few years, many policymakers are now taking steps to legislate the mortgage process into simplicity by standardizing forms and eliminating confusing financial products.  Time will tell whether these approaches will have the desired effect, but one thing is certain.  The mortgage industry needs to take larger strides to educate consumers about the working parts of the mortgage process.  The market will face additional collapses in the future if this issue is not resolved.