How Mortgage-Savvy Are You?

May 9, 2011— -- In spring, two things show up in front of houses: new flowers in the yard and home buyers on the doorstep.

With any luck, those buyers will spend spring looking and summer moving in before kids have to head back to school.

While a lot of people will scrutinize the kitchen countertops and bathroom tiles in the homes they tour, most don't scrutinize something that is a much more important part of your purchase: the mortgage.

This is a pet peeve of mine, but you don't have to take my word for it. A new survey from the mortgage marketplace part of real estate website Zillow.com proves it.

Zillow surveyed prospective home buyers and found that 44 percent were not confident that they truly understood mortgages or the process of getting one.

Think you know better? Then I challenge you to answer a few of these sample questions from the Zillow quiz.

1. True or False? If you have a 5/1 ARM, the interest rate will always reset higher after 5 years.

2. True or False? Lenders' mortgage fees are negotiable.

3. True or False? It's always a good idea to buy mortgage discount points when taking out a mortgage in order to save money.

4. True or False? Mortgage rates fluctuate throughout the day.

5. True or False? FHA (Federal Housing Administration) loans are available only to first-time home buyers.

So, how'd you do? Here are the answers (and there are explanations further down):

1. False.
2. True.
3. False.
4. True.
5. False.

If you got some or all of the answers wrong, you're not alone.

"Each year, many buyers commit to the largest loan they will take out in their lifetimes without understanding essential information about mortgages," said Zillow mortgage marketplace director, Erin Lantz. "By simply spending a few hours researching how a mortgage works, and by shopping around for the most competitive rates and fees, buyers can save a lot of money."

And that's the hook! Understanding mortgages and shopping around for the best possible one can save you more money than almost any other step you can take in life!

So, let the education begin now. Here's how other respondents fared along with Zillow's explanations of the correct answers to its quiz questions.

1. More than half (57 percent) of prospective home buyers who were polled do not understand how adjustable rate mortgages (ARMs) work. When asked if interest rates on 5/1 ARMs always reset higher after five years, the majority of home buyers answered yes. In fact, the interest rate will adjust to the prevailing rate after five years, even if rates have declined. True, interest rates often do go up, but currently, many borrowers whose ARMs have recently reset have lower interest rates than they did when they took out the loan.

2. One-third (34 percent) of the respondents who are prospective home buyers did not realize that lender fees are negotiable and that they vary by lender. They believe lenders are required by law to charge the same fees for credit reports and appraisals when, in fact, home buyers can save money by shopping for the lowest fees.

3. Nearly half (45 percent) of polled prospective home buyers believed that they should always buy mortgage discount points when obtaining a mortgage. However, because mortgage discount points are simply prepaid interest, the decision should depend on how long you intend to own the home. In some cases, you may not plan to remain in the house for long enough to break even after buying points.