Your ability to read and understand your home loan – and crunch the numbers yourself – plays a major role in your likelihood of default. According to a report from researchers at the Columbia Business School, the Federal Reserve of Atlanta, and the University of Zurich, borrowers who are “math-challenged” are five times more likely to default on their home loans. The study covered the loans of borrowers who held mortgages issued in 2006 and 2007; 25 percent of borrowers who scored in the lowest bracket for math skills defaulted on their mortgages within five years of getting the loan while only five percent of the top tier defaulted[1]. Researchers said that they covered for differences in “overall intelligence” by measuring “verbal and general IQs…math skills, and control[ing] for socioeconomic factors.”

The default numbers were not affected when the researchers separated the groups based on the type of mortgage that they had. Higher and lower-risk borrowers still defaulted along the same math-ability lines no matter what type of mortgage they took out. “Those lacking [math skills] will still get in more trouble later on even if they pick a plain vanilla mortgage,” explained Stephan Meier, one of the study’s authors. Ultimately, the difference did not occur in actual financial decision-making, but in the ability to avert a foreclosure. The authors suggested that “greater cognitive abilities may have helped some borrowers find a way out of delinquency”[2].

by Carole VanSickle

 


[1] http://money.cnn.com/2013/06/25/real_estate/mortgage-math/index.html

[2] http://blogs.discovermagazine.com/d-brief/2013/06/24/poor-math-skills-make-a-mortgage-default-more-likely/#.UcsPZpz3OHg