One-third of us home buyers do not understand mortgages

The portal’s Mortgage Marketplace survey of prospective and current homeowners shows that buyers are returning to the market in droves after several years of depressed demand for homes, but many are ill-prepared to take out a mortgage, answering basic questions about mortgage information wrong nearly one-third (32.5 percent) of the time.

For example, one-third (34 percent) of first-time homebuyers are not aware that it is possible to get a home loan with a down payment of less than 5 percent. In fact, the number of lenders on Zillow Mortgage Marketplace quoting loan requests with a down payment between 3.5 and 5 percent has risen by 570 percent over the past two years.

Homebuyers also do not understand how to secure the best possible interest rate and loan terms. One-quarter (26 percent) of homebuyers incorrectly believe they are obligated to close their loan with the lender that pre-approved them, and, separately, 24 percent of homebuyers incorrectly believe that the best interest rates and fees can always be found through the bank they currently do business with. Additionally, one-third of buyers (34 percent) believe all lenders are required by law to charge the same fees for credit reports and appraisals.  In fact, homebuyers should always shop multiple lenders to compare rates and fees in order to find the best loan for their situation.

The survey also reveals that current homeowners lack understanding of basic refinancing rules, which may be costing them money each month. One in five, or an estimated 14 million homeowners, said they did not believe underwater borrowers could refinance. In fact, more than 2.2 million underwater borrowers have already refinanced through the federal Home Affordable Refinance Program, which was recently extended through 2015. Separately, almost half (47 percent) of current homeowners believe they must wait at least one year between refinancing.

"All too often buyers focus on negotiating a lower home price and ignore the importance of finding the right loan. If a home buyer can lower their interest rate by even half a percentage point, they can not only increase their purchasing power, but save thousands of dollars over the life of the loan," said Erin Lantz , director of mortgages for Zillow. "Buyers should always shop multiple lenders and compare rates and fees and read lender reviews in order to find the best loan for their situation."