Selecting the Wrong Mortgage

Borrowers often make mistakes in selecting the mortgage type. Most begin the process ignorant, the advice they receive is often poor, and the Government-mandated disclosures they receive don't help.
Borrower Ignorance: Mortgages are complicated, and consumers are exposed to them only once or a few times during a lifetime. They have no opportunity to enhance their knowledge through trial and error, which is largely how they learn about other products. While some potential mortgage borrowers, recognizing the importance of the decision, will put in the time required to become knowledgeable, most prefer to depend largely on the advice of others.
Poor Advice: Unfortunately, reliable advice is hard to find. Most borrowers get their advice from their loan provider (LP) -- a loan officer or mortgage broker. In the worst case, which was fairly common before the financial crisis, LPs steered borrowers to the products on which the LP made a larger commission. Under regulations issued this year, such steering is against the law.
Eliminating biased advice does not generate good advice, however. Most LPs remain transaction-oriented, meaning that they are looking to get the deal done rather than to establish a relationship with the client. They earn no more if the borrower selects the right type of mortgage than if they select the wrong type. What matters is that the borrower is satisfied with the LP's advice and that the loan closes.
The advice of LPs is only as good as their capacity to provide it, and while there are some good ones, most are poor. They are not selected for it, they are not trained for it, and they are not rewarded for it.
Poor Disclosures: One of the alleged purposes of mandatory disclosures is to help borrowers compare different types of mortgages. The cornerstone of such efforts is the annual percentage rate or APR, which is supposed to be an objective measure of mortgage cost that allows borrowers to make unbiased comparisons. But the APR is a misleading measure for many borrowers, including the sizeable group that expects to hold their mortgage less than 10 years.
Borrowers who make their mortgage selection here receive decision support developed by the professor, and have access to the professor or one of his colleagues if necessary.
Suggested additional reading: Mortgage Selection in the Post-Crisis Market.

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