Many borrowers lack mortgage knowledge.

SEATTLE – May 2, 2011 – A recent survey by Zillow Mortgage Marketplace found that borrowers who received a home loan in the past five years spent, on average, five hours researching their options. That’s about half the amount of time borrowers spent researching a car purchase (10 hours). What’s more, nearly one-third spent two hours or less, according to Zillow.

While a home purchase is typically one of the largest investments people make, the lack of mortgage knowledge can be a costly mistake, experts say.

Here are a few basics about home loans that more customers need to understand.

1. What type of mortgage do you have?
Alarmingly, some people don’t know whether they have a fixed-rate mortgage or adjustable-rate mortgage. Unlike a fixed-rate mortgage, an ARM can have low rates early on that later rise significantly over time, which from a financial planning perspective can become a costly surprise if the borrower isn’t even aware they have one.

2. Do you have mortgage insurance?
Homeowners who purchased a home with conventional financing and a downpayment of less than 20 percent may not realize that they likely are probably paying private mortgage insurance, which costs about $25-$100 extra a month. Once homeowners have sufficient equity in their home (20 percent), they no longer need to pay mortgage insurance and should contact their lender for some savings.

3. Do you understand all of your loan options?
Many borrowers don’t understand all of the loan options available to them – conventional loans, FHA, VA, USDA, etc. Experts recommend researching and comparing various mortgage rates and loan types to see what works best for each specific situation.

4. Is there a prepayment penalty?
Some loans have a prepayment penalty if a borrower pays off the loan earlier than intended. Typically, prepayment penalties are charged when borrowers sell or refinance their homes in the first few years of the mortgage. FHA, VA and USDA loans do not have prepayment penalties. But it’s important homeowners with other mortgages become aware whether their loan has a prepayment penalty and understand the pros and cons of accepting such a penalty, experts note.

Source: “5 Things to Understand About Your Home Loan,” Zillow.com (April 19, 2011)

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