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Do You Know Your Loan?
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Also, the study found that a sizable number of borrowers think they know how high their rates can jump but really don't know.
Borrowers with less education and lower incomes were even less likely to know their mortgage terms, according to Fed economists Brian Bucks and Karen Pence. And nonwhite or Hispanic borrowers were about twice as likely not to know.
The Fed study, though, likely underestimates the problem, according to consumer groups. It was based on 2001 data and thus doesn't account for the wave of interest-only ARMs and option ARMs that has hit since then, activists say.
In the Washington area, interest in the exotic loans has been much higher than the national average, according to LoanPerformance, a real estate information firm.
About half of new mortgages made in the area in January and February were interest-only, and 21 percent were negative amortization, according to LoanPerformance.
Of the 15 individuals and couples quizzed last week at Reston Town Center, six had ARMs.
Three rented, so they didn't qualify for the test.
Another had paid off her mortgage, so she was sitting pretty. (She's not alone. About a third of all homeowners have burned the mortgage.)
Of the 11 in Reston who said they did have a mortgage, five were able to quickly rattle off their terms because their loans are fixed rate, meaning the interest rates won't ever change.
No surprise there. Fixed-rate loans, either for 30 years or 15 years, are the traditional type of mortgage loan in America and the type held by the most borrowers -- about 47 percent.
Of the six interviewees with ARMs, three were up on how high their rates could jump, how much they could increase at any one time and what exactly triggers the rates to change. That's a 50 percent score in the "don't know" column, compared with about 40 percent for the Fed study.
The small sample makes such levels of precision meaningless in statistical comparisons. And, said former banker Smucker, borrowers here generally have a decent grasp of their finances. "In this area, people are pretty smart about these things. They're more knowledgeable here than just about anywhere else, I think," she said.
