April 26, 2018

Study: Bad Math Skills May Doom a Home Owner

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Study: Bad Math Skills May Doom a Home Owner

A new study finds that home owners with poor math skills were five times more likely to default on their loans and end up in foreclosure during the housing crisis than home owners who were good with arithmetic. 

"Whether you're good with numbers predicts how likely you are to default," says Stephan Meier, an associate professor of business at Columbia Business School, and one of the authors of the report.

For the study, researchers evaluated hundreds of borrowers who held a mortgage in 2006 and asked them five basic math questions. For example, participants were asked how much a $300 sofa would cost at a half-price sale, and how much a savings account of $200 would increase when earning 10 percent interest for two years.

Researchers found that 25 percent of borrowers who scored the lowest in math skills had defaulted on their mortgage payments within five years of getting the loan. Of the home owners who scored in the top tier in math skills, only 5 percent had defaulted on their loans.  

The researchers also found that it did not matter the type of mortgage the home owner had, but home owners with poor math skills were still likely to default even if they had a “plain vanilla mortgage,” says Meier. 

Past studies have suggested that people with poor math skills tend to do less budgeting, misuse credit cards, and may fail to negotiate the most favorable settlements with lenders. 

Source: “Bad at math? You're more likely to lose your home,” CNNMoney (June 25, 2013)

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