Monday, July 9, 2007

Mortgage cost disclosures “confuse” borrowers

A Federal Trade Commission survey found that current mortgage cost disclosures are unclear and confusing to most consumers. More than 80% of the borrowers surveyed could not identify the upfront costs associated with a loan. Four out of five borrowers could not understand why the APR (annual percentage rate) was different from the stated interest rate on the loan, and more than 60% of the participants did not notice that their terms included a pre-payment penalty. More than 20% of those surveyed could not identify the total amount of settlement costs.

Researchers also found that many borrowers could not properly understand their mortgage disclosures, and were not fully aware of the costs associated with their loans. Many were not aware of restrictions, such as prepayment penalties, included in their own loan terms. FTC researchers concluded that disclosure forms were to blame and developed a simplified disclosure form which clearly specified the type of loan, any restrictions, and loan charges, as well as the APR, monthly payments and other information.

When consumers were shown this new form, they were able to understand loan terms much better and give correct answers to questions about their mortgages. This study is likely to trigger a change in mortgage disclosure forms, which will help consumers make better financial decisions and avoid risky loans.

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