Avoid Foreclosure: Do Your (Math) Homework

How are your math skills? Did you breeze through high school algebra and Econ 101, or struggle through the former and never get to the latter? It turns out, perhaps not surprisingly, that people who know more math and economics are less likely to default on their mortgages.

Stephen Meier, an assistant professor at Columbia Business School, tested sub-prime borrowers in three states on their basic math skills, economic literacy and thinking skills. He found that those with the least numerical knowhow were delinquent on their mortgage 24 percent of the time, twice as often as those with the most.

This group was also three times more likely to face foreclosure than their math-savvy counterparts.

Meier told HousingWatch, "The default rates for those in the lowest numerical ability group were similar across all types of mortgages." This suggests that people with poor math skills are more likely to get into trouble because they're less able to manage their money in general, not simply because they borrow more than others or are steered toward riskier loans.

So what can those who don't know much about algebra do to keep their finances healthy and their mortgage current? Here are a few ideas:

Learn how to budget.
There are plenty of tools around today to help you speed through stuff that's too hard-or boring-to do on your own. Try some online calculators or software and advice from companies like Intuit.

If you prefer a low-tech approach, try shopping for a book or workbook to walk you through the process.

Study up.
Meier notes in his report that while college-educated borrowers are less likely to have trouble "dividing 300 by two -- the easiest of the questions we ask on the survey," that doesn't mean they know all the basic financial concepts you need to be a good borrower, "like what compound interest is or what inflation does."

If you don't know those things, it might pay to head to a community college or to a continuing education program and look for courses in economics, or family and consumer science (it used to be called "home ec") . You should be able to find classes where you can brush up on these must-know financial basics.

Be skeptical.

Just because financial companies will let you borrow a certain sum of money or buy a house with little or no money down, doesn't mean you should.

Mortgage companies estimate that you can direct up to 45 percent of your income to paying down your debts, including student and car loans, credit cards and your mortgage. But it isn't necessarily prudent to get quite that deep in debt. First, figure out for yourself what you're comfortable borrowing and what you can probably handle if things go wrong (you lose one of two incomes, other household costs go up, you have an expensive emergency like your boiler breaking in January). Then go shopping for a house and a mortgage in your price range.

Or bone up on budgeting and save more before you buy.

Seek Advice.
Meier says that not everyone can be an expert in everything: "I'm bad at biology, which is why I have a doctor. I'm bad at cars; that's why I have a mechanic. A lot of people don't have the time or the financial skills, and financial decisions are more complicated today, so we really do need to reach out."

He urges people (who recognize what they don't know) to reach out to family, friends and co-workers (who do), just as they would on other matters. Or they should be willing to get professional advice from financial planners, real estate attorneys or even your accountant.

"In a time where people distrust everything that has to do with finance, it's not so easy to do," says Meier, "but you have to try and, just like with doctors, you should get a second opinion and do your homework."

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