Philadelphia Weekly

REAL ESTATE

Impulsive mortgage decisions cost borrowers

Don't assume FHA loan is a better deal than conventional

By Inman News Feed

Add Comment | Comments: 0 | Posted Jun. 4, 2012

$78,753

The FHA has a lower rate and a lower monthly mortgage payment, but the borrower has to pay a monthly mortgage insurance premium, which makes the total monthly payment on the FHA significantly higher. Further, the total cost of the FHA over the eight years the borrower expects to have the mortgage is substantially higher. The borrower should have selected the conventional. In fact, he selected the FHA.

Why he made this mistake I don't know, but it was not because of a lack of information. He had all the relevant data, which included a complete breakdown of the components of total cost. My surmise is that he saw the large difference in the interest rate, and at that point his mind disengaged. A further check revealed that other borrowers were making the same mistake.

Is there any way to protect consumers who, despite the large amounts of money at stake, make decisions impulsively rather than thoughtfully? Displaying all the information available for a rational decision is clearly not enough. It also matters how the information is displayed. In the case at hand, we decided to change the tabular display shown above with the one shown below.

30-Year Fixed-Rate Mortgage of $250,000

Type of Loan

Interest Rate

Monthly Payment of Principal, Interest and Mortgage Insurance

Monthly Mortgage Insurance Payment

Total Cost Over 8 Years

Conventional

4.125%

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