Confused by your mortgage forms? You’re not alone. A recent study of mortgage disclosure forms for the Federal Trade Commission (FTC) concluded that many borrowers don’t understand key items in the forms provided by lenders and have “significant misunderstandings about the terms of their recently obtained loans.”
Lenders are required by federal law to provide consumers with “truth-in-lending” and “good-faith-estimate” disclosures that outline the various costs and terms of their mortgages. The problem is these forms, designed over 30 years ago, can be confusing to borrowers and don’t explain in simple enough language key mortgage costs and terms.
In fact, the study found that nearly nine out of 10 borrowers had difficulty identifying the amount of upfront charges associated with a loan and nearly two-thirds did not recognize that they would be charged a pre-payment penalty if they refinanced the loan with another lender during the first two years.
The seriousness of this problem has been made apparent by the recent meltdown in the sub-prime mortgage market. Many homeowners who signed on for unconventional mortgages without understanding the risks involved are now finding themselves in a position where they can’t meet their increased monthly payments and are facing foreclosure. The FTC study found that better disclosures could improve customer understanding of mortgage products and hopefully prevent a repeat of today’s scenario in the future.
The study’s researchers tested over 800 recent mortgage customers. Half were given a simplified prototype mortgage cost disclosure form and the other half today’s standard forms. The result was a significant increase in understanding among those given the prototype: Eighty percent of those provided with the new form were able to answer 70 percent or more of the questions about their mortgages correctly, compared to only 29 percent of those given the current forms.
The key findings of the study, as listed in the FTC’s “Executive Summary,” were:
- Current mortgage cost disclosures failed to convey key mortgage costs to many consumers.
- Both prime and subprime borrowers failed to understand key loan terms when viewing the current disclosures, and both benefited from improved disclosures.
- Improved disclosures provided the greatest benefit for more complex loans, where both prime and subprime borrowers had the most difficulty understanding loan terms.
In summary, the study shows that better disclosures are needed to help borrowers recognize true mortgage costs and avoid potentially deceptive lending practices. However, don’t expect to see an immediate replacement of our current mortgage forms with the new forms. Until that occurs, be sure to ask your lender to explain anything in your mortgage forms that isn’t clear and don’t sign for a loan until you have a thorough understanding of all of its terms, payments and potential penalties. Otherwise, your mortgage could end up costing you more in the long term than you bargained for.