Things you could buy for a dollar years ago are probably a lot more expensive…
More often than not, first-time homebuyers who sit down with a lender’s mortgage processor to discuss the terms of a possible loan feel overwhelmed not long into the meeting. The experience of being bombarded with arcane financial terminology, confusing math and obscure rules is nothing short of distressing.
While these discussions are ostensibly aimed at helping hopeful homebuyers understand the process well enough to make meaningful and educated choices, all they usually do is to convince them to give up even trying, and merely trust the bank to tell them what might be best for them.
The high mortgage delinquency rate has been one result
With one in 25 mortgage borrowers today unable to continue paying, a recent study published in Journal of Policy Analysis and Management followed 2,000 borrowers to identify ways to help with the problem.
When first-time homebuyers were offered a short stint at a homebuyer education workshop, the result was a dramatic 50 percent drop in default and delinquencies. It’s a simple, commonsense idea: when embarking on a major financial undertaking, it helps to go in armed with some financial literacy.
Financial literacy classes are mandatory for those who apply for down payment assistance. It would make sense to apply even if no one makes you. If you plan to borrow, taking the class could help you lower your risk of ever coming close to default.
What goes on at one of these workshops?
In homebuying workshops, teachers take learners through the requirements that lenders put in place. They help borrowers understand:
- What credit worthiness is
- Interest rate calculations
- How to read mortgage terms
- How to work out the real cost of every mortgage when comparing mortgages
- How home mortgage insurance works
- Closing costs and the other hidden costs involved in borrowing
- How to deal with real estate agents
Borrowers also learn what might be the most important part of preparing for the responsibilities involved in borrowing: separating emotion from logic in gauging ability to repay. Far too often, default and delinquency occur simply because borrowers enter buying decisions emotionally, rather than logically. As a result, they overestimate the dependability of their income and miscalculate the frequency with which unforeseen expenses can occur.
Borrowers who take these courses are able to walk up to mortgage representatives at banks and speak with some authority about obscurities such as qualifying ratios. It tends to help win their respect, and helps make for a smoother borrowing experience.
Learning the secrets of borrowing
Mortgages are such complex deals, missing one minor detail that can cost you thousands. Workshops help you know what you shouldn’t miss. For example:
- Paying twice a month — When you ask to make payments once every two weeks, rather than once a month, you get to save greatly over the 30-year payment period. The average homebuyer ends up saving $20,000 over this period.
- Rates and fees can be cheaper when you shop around — From origination fees to closing costs, there are many kinds of costs involved in signing up for a mortgage. Different banks charge them at different levels, and it’s important to shop around for savings. As long as you do your shopping in a 30-day period, the credit reporting company won’t mark the activity negatively.
- Points can help you lower your interest rate — A point is a 1% discount on the quoted interest rate. If you have a long-term loan, paying $2,000 for a couple of points is a good idea.
- A no-closing-costs offer is a bad idea — Some lenders offer a no-closing-costs deal to bring in customers, but they usually make up their costs elsewhere. It’s a gimmick.
How do you find a mortgage education workshop?
There are a number of options for choosing a homebuyer mortgage education workshop. Whether you choose to learn online or offline, go paid or free, it’s a good idea to find a course that comes with accreditation by either the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
It can also help to ask nonprofits like NeighborWorks America for a recommendation. If you would like to teach yourself, the websites of the National Database (hud.gov/offices/hsg/sfh/hcc/hcs.cfm) and CHAPA (chapa.org) are good destinations for reliable information.
Financial literacy that goes beyond homebuying
Financial literacy is so basic a skill, lessons are mandatory in schools in 14 states. For many, however, lessons learned in school are quickly forgotten with time. If you grew up in a state without financial literacy classes, or if you’d like to give yourself a refresher, the website of the National Financial Educators Council is good place to start. It has great course material for those who like to learn on their own. They have lessons for every grade of reader from prekindergarten to high school, college and after. If you’re not the self-learning type, many community organizations help with classes.
Lack of understanding of how money works, rather than lack of money, is usually the most dependable indicator of poor financial outcomes. Such struggles aren’t necessary, however, considering the ease of availability of financial education. All that’s needed is the knowledge that such education is important.