In 2004, Congress declared April as National Financial Literacy Month. For many, this means learning about managing credit-card debt and analyzing credit scores. But as more and more consumers take steps to improve their knowledge and understanding of personal finance, they should also consider how a mortgage might — or might not — fit into their overall financial picture.
The real estate market is continuing its gradual recovery, and this past February, existing home sales increased 4.7 percent year-over-year, according to data from the National Association of Realtors. As the market stabilizes, many consumers are starting to consider purchasing a home, particularly first-time homebuyers and those in the millennial generation. For these buyers, it is especially important that they closely examine not only their personal finances but also all the fiscal responsibilities that come with buying a home, starting with the largest one: the mortgage.
A mortgage is a complex financial instrument, and if there was anything the recent financial crisis taught the real estate community, it was that many homebuyers go into what might well be the largest financial transaction of their lives not actually understanding either the application process or the many mortgage obligations entailed after the sale is closed.
According to the Federal Reserve Bank of New York, mortgages make up the largest component of household debt. In fact, in the most recent quarterly report on Household Debt and Credit, mortgage balances stood at $8.17 trillion, almost 70 percent of total household debt. Before taking on such a significant responsibility, potential homebuyers should educate themselves thoroughly on the mortgage process, the qualifications, the various fees one incurs and the ongoing responsibilities it entails.
Real estate agents working with first-time or inexperienced homebuyers should encourage their clients to investigate the rights and responsibilities a mortgage confers. Their lender should have tools in place to help them achieve a thorough understanding of their financial commitments. Although homebuyers are responsible for any loan they undertake, it is also the responsibility of the lender to fully explain the details and complexities of the mortgages they offer.
To that end, some lenders offer different tools to help potential clients learn more about the mortgage process and what it means for their financial health. This kind of fiscal education is critical to having an informed homebuyer, and an informed homebuyer is more likely to not only close the deal on a home, but also to return for repeat business when they are ready to move up the real estate ladder.
Look to partner with lenders who offer comprehensive mortgage education, not just glossy overviews. Some lenders offer online tools that walk borrowers through every detail of their mortgage, giving them a thorough understanding of all their obligations under the mortgage application and contract. For example, many who undertook mortgages during the boom years of the early 2000s didn’t understand their loan reset to a higher rate (when they had an ARM), or they didn’t understand the work-out process. It’s misunderstandings like these that can lead to delinquencies and even foreclosures, which only hurt the market.
Homebuyers also should look for resources outside of their lenders’ offerings. Real estate agents working with first-time homebuyers or inexperienced consumers should be aware of the varied resources and educational tools available to potential homebuyers today, many of which are accessible online.
First, you might want to start with the basics and direct clients to access their free annual credit report. Reading through this and understanding what drives their scores is an important first step to overall financial literacy. Next, clients should make sure they understand all the terminology that will be used while buying a home. Sites like the Center for Responsible Lending offer glossaries that explain mortgage and finance terms. Clients should also look into first-time homebuyer seminars for an overview of the process and to get any specific questions answered.
Finally, point clients to the Consumer Financial Protection Bureau (CFPB) to get more information on specific mortgage-related questions and issues. This governmental agency was created to help consumers better understand their financial undertakings, and their website hosts a wealth of information critical to homebuyers. They offer an interest-rate review tool that samples real rates from lenders across the country, as well as documents that explain complex closing forms and provide a closing checklist for homebuyers. Here, they can also look for complaints about lenders they are considering using; the Better Business Bureau is also an excellent resource to help clients ensure that they find a reputable lender.
An advocate for these clients, those who can help leverage these resources will provide added value and service. Consumers with access to these resources should have no reason they should not be making solid, educated decisions about their finances and buying a home.
The wealth of information can be overwhelming. However, real estate agents with these resources can assist and advise their clients to achieve mortgage literacy. Borrowers must understand critical details such as transaction costs, mortgage loan principal amounts, the term of the loan, interest rates and monthly loan payments, as wells as contingencies for missed or late payments.
By working with experienced real estate agents and lenders who provide the necessary homebuyer education, today’s consumers can increase their mortgage literacy and, not only better understand their responsibilities as a homeowner, but also improve their overall financial literacy.
Ray Brousseau serves as executive vice president of Carrington Mortgage Services.