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The Baltimore Sun

After shopping for a home, tired buyers often make poor mortgage choices

New research suggests that buyers' minds are so taxed after they go through the ordeal of finding a house that they often rush into the next step — applying for a loan — and make poor choices.

Sometimes they opt for the first choice presented to them without regard to the dangers that may be inherent in that particular mortgage. Other times they pick the loan with the lowest monthly cost, even though the price might skyrocket in a few short years.

It's a phenomenon called "cognitive resource depletion," and it has been identified by two George Washington University instructors as an often crucial factor in why the choices borrowers make may come back to haunt them.

Shopping for a home and choosing between alternative features "can deplete individuals' cognitive resources, resulting in sub-optimal home-financing decisions," according to associate professor Vanessa G. Perry and doctoral student J.D. Lee, who teach at the university's business school in Washington, D.C. After the shopping experience, consumers may devote less attention to the mortgage-choice process, they added, relying on faulty-decision shortcuts that "ultimately result in a higher propensity" to select higher-risk mortgage products.

Cognitive resource depletion is a well-proven principle that holds that willpower is a limited resource that can be used up. And it suggests that once a person's self-regulation battery is run down, he or she shouldn't make any major decisions until the battery is recharged.

Perry and Lee's study hypothesizes that resource depletion (or "ego depletion," as the phenomenon also is known) might be one reason that borrowers choose such toxic loan products as pick-a-pay mortgages, interest-only loans, loans with balloon payments and mortgages with negative amortization.

All have been identified as hazardous choices for unsophisticated borrowers, and blamed in large part for the subprime-mortgage fiasco.

But Perry says everyone is susceptible to the phenomenon. And she suggests that because loan choices and decisions are so complex, even financially savvy borrowers should delay entering into the mortgage arena until well after they've decided on the house they want to buy.

Waiting a couple of hours to apply for a loan won't cut it, says the associate professor of marketing who once worked as a senior economist at mortgage giant Freddie Mac. The buying and lending decisions are "too intense" to act so quickly.

"It might take a couple of days, at least, or it could take longer," Perry says, to get the buying decision off your mind.

Of course, most sales contracts compel buyers to secure funding within a certain, often abbreviated time frame. So the better option, Perry believes, would be to apply for the loan first and get preapproved. Then, once that hurdle is overcome, you can begin searching for a house.

To test their theories, Perry and Lee created two groups. One was presented with an online-shopping simulation that involved 14 choices about housing characteristics, including colors, finishes and possible trade-offs if a participant came in over budget. After completing the simulation, they were asked to choose among a set of mortgage alternatives presented in a format adopted from the website of a national lender.

The other group did not complete the online-shopping exercise. Instead, participants were informed that they already had selected a new house and then were given the same mortgage choices as the first group.

The loan choices consisted of five distinct products. Each included a monthly payment, an interest-rate offer and a loan term. After each choice, a link was presented that said, "For more details, click here." Anyone who clicked on the link was directed to a website that offered detailed information about mortgage products and financing terms.

The results? Almost half of those who participated in the house-shopping exercise selected a higher-risk mortgage. Fewer than 1 in 5 of those who did not have to work through the buying simulation did the same.

In other words, the resource-depleted group was far more susceptible to picking more dangerous financing. These participants were so worn out that they didn't devote as much time to selecting a loan as those in the second group.

"Instead, they focused on the lowest monthly payment regardless of the other terms," Perry said.

Distributed by United Feature Syndicate.

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