Homebuyers: 1 in 3 clueless about mortgages (MoneyWatch) Two new studies indicate that many people simply don't know what they're doing when they take out a mortgage. When the housing market started falling apart six years ago, much of the blame fell on homeowners who bought homes they could not afford using mortgages they did not understand. Apparently, we haven't learned our lesson. As much as one-third of people applying for mortgages today don't fully understand the terms of the document they're signing, according to a Yale Law Journal study and a study from Zillow, which were unrelated but bore very similar results. According to a three-year study by Jessica Choplin, associate professor of psychology at DePaul University, and Debra Pogrund Stark, professor of law at The John Marshall Law School in Chicago, 31 percent of study participants did not realize basic principles involved in a mortgage. In fact, many didn't even read the terms. Researchers used visual sensory technology to track eye movement to see what participants were actually looking at. The participants were first verbally informed of either the initial interest rate or initial monthly payment -- for example, they were told the initial loan rate would be 4 percent -- and then were instructed to review the disclosure form to prepare to answer questions about the loan. Although the form included a sentence identifying the loan as having an adjustable rate, nearly one-third of those reading didn't know it. Instead, they skimmed the form, looking for confirmation of what they had been told, and looked no further. The fine print went right over their heads. When researchers switched to using the new disclosure forms, lenders are now required to use -- which more clearly outline loan terms more clear than the old forms -- 19 percent still failed to notice that the loan's rate would adjust over time. Worse yet: When researchers introduced distractions, the number skyrocketed to 45 percent failing to comprehend the loan terms. "Even with improved forms, if the borrower is distracted by conversation, they can fall prey to interjected distractions," Stark said. All it takes is someone asking a question or making a comment not related to the document and the borrower can miss important information. These types of distractions routinely occur at closings. Even when many of the would-be borrowers noticed that the rate was adjustable, they didn't realize how rate increases could potentially make their loan quickly unaffordable, Stark said. Meanwhile, in an unrelated Zillow study, more than 1,000 potential homebuyers were given a true-false mortgage IQ quiz that included questions about mortgage rates and lenders. Participants answered these basic questions wrong 32.4 percent of the time. For example, 34 percent of prospective homebuyers did not know that APR is a yearly rate that includes the interest rate, points, mortgage insurance and other fees, and is used to compare loan quotes from lenders. One-quarter of participants incorrectly believed they are obligated to close their loans with the lender that pre-approved them, and, separately, 24 percent of homebuyers incorrectly believed that the best interest rates and fees can always be found through the bank they currently do business with. Additionally, 24 percent believed all lenders are required by law to charge the same fees for credit reports and appraisals -- neither of which are true. Apparently, too many homebuyers do not understand the importance of shopping around. All too often, buyers focus on negotiating a lower home price and ignore the importance of finding the right loan. If a homebuyer 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, in a press release. You can take the quiz for yourself here. How to help homebuyers? Researchers are advocating for more mortgage counseling for first-time homebuyers. They will benefit from it by saving money and understanding what they're doing, and so will the housing market at large. With more educated buyers in the market, we can hopefully avoid another flood of foreclosures.