New research suggests buyers applying for mortgage loans immediately after house hunting often make poor choices-sometimes selecting the first loan option presented, regardless of the terms with which it is associated.
KEEP THIS IN MIND
• The research, conducted by two George Washington University instructors, found "cognitive resource depletion" to be a determining factor in why some borrowers make poor choices in selecting a home loan. Cognitive resource depletion implies willpower is a limited resource that can be exhausted. The study suggests the depletion of willpower may be one reason borrowers choose loan products such as pick-a-pay mortgages, interest-only loans, loans with balloon payments, and mortgages with negative amortization.
• To test the theory of cognitive resource depletion, two test groups were created. One was presented with an online-shopping simulation, the other was not. The group completing the simulation then was tasked with selecting a set of mortgage alternatives. The second test group only was asked to select a mortgage product. Almost half of those participating in the house-shopping exercise selected a higher-risk mortgage, while less than one in five of those who did not participate in the experience selected a higher-risk mortgage.
• Although most sales contracts require buyers secure financing within a designated time period, the authors of the study recommend even financially savvy borrowers institute a waiting period of at least two days after selecting a home to purchase before applying for a home loan. To address this, the authors and most real estate professionals advise home buyers apply for a home loan and receive preapproval prior to searching for a house.
reprinted from CAR's "Market Matters" newsletter, original article: LA times
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