I’m thinking back to the countless hours spent scratching my head in math class asking myself, “When am I ever going to use this stuff in real life?” A new study out of Columbia University is attempting to provide at least one answer.
Study says math deficiencies increase foreclosure risk, the headline in The New York Times reads. The assistant business professor who led the study found that borrowers with poor math skills were three times more likely than others to go into foreclosure.
“Overall, 21 percent of the respondents whose math abilities placed them in the bottom quarter of the survey experienced foreclosure, versus 7 percent of those in the top quarter,” business and technology reporter Bob Tedeschi writes.
But do poor math skills cause borrowers to go into foreclosure? Our pal and real estate agent Ken Montville of MD Suburban Homes thinks it’s a bit of a stretch, yet he agrees a homeowner who can’t balance his checkbook or budget for future expenses is at a disadvantage.
In Tedeschi’s article, Richard L. Tracy, Jr. of Campbell Mortgage asserts that borrowers with math deficiencies would most likely have a weak credit score, too.
The credit score may be a good indicator into how a borrower has handled previous debts, but it’s not a crystal ball that can predict how a borrower will rebalance his budget if he loses his job or if the interest rate on his adjustable rate mortgage resets and ups his monthly payment beyond his comfort level.
Whether financial illiteracy causes borrowers to go into foreclosure down the road or not, it’s tough to say. But what is certain is that it’s the homebuyer’s responsibility to understand the terms of his loan – including such mathematical concepts as amortization, principal and interest, interest-only versus fix-rate loans, percents and fractions – and make an educated decision.
What a coincidence the Merriam-Webster definition for literate is “having or displaying advanced knowledge or education.” Cause or correlation aside, let’s just say it would behoove you to know a little math before you plunk down several thousand dollars at the closing table.