Money-Smart Kids/Mortgage 101 for kids
In February 2000, I endeavored on buying my first home. I can remember the scary concept of taking out my first mortgage. The whole idea of owing someone money put a pit in my stomach. So owing someone money for 30 years was just mind-blowing for me.
And so after I found what I was looking for, I went to my bank to secure a 30-year fixed mortgage at the interest rate of 8.5 percent. When interest rates began to drop, I refinanced that mortgage at 7.625 percent. Then a year later -- I was making a habit of this -- I got it to 6 percent.
And if I had told you back in 2000 that 11 years later I would be refinancing again with a 4.5 percent 30-year fixed rate, you would have told me I was crazy. But guess what? I might be crazy but then so are the banks.
This story turns out to be a great lesson for kids to learn about money. I think it might be interesting for you to discuss with your middle or high-school aged children what a mortgage is and how it works. Try this progression of questions with your kids:
1. How much do you think our home is worth? After they guess, send them to www.zillow.com to see how close they were. I know it's not always close to accurate but let's not let great get in the way of good.
2. Now that you have a number of what you think the house is worth, how do you think we paid for it? The two possible answers are "paid in cash" or "borrowed money." Tell the story as your kids will actually appreciate your thinking they are mature enough to trust on this topic.
3. We borrowed money from the bank. Explain what a mortgage is, including principal and interest payment discussion. Tell me, if we were getting charged 8.5 percent by the bank, and the loan was for 30 years, how much we would have to pay the bank every month. There are plenty of online calculators to help them with this calculation.
4. Great, you're getting the hang of this exercise. There is a new twist. A 30-year fixed mortgage doesn't cost 8.5 percent today. Can you find out what the current rate is for a $________ 30-year fixed mortgage?
5. This is the last question I have for you. Refinancing a mortgage costs money to do. Can you find out for me at what rate I should consider refinancing our mortgage at? If you're not sure, send them to www.zwicke.nbr.org/refinance to use their online calculator.
You've now got your children thinking about the mind-numbing number of variables that go into the home-buying decision making process. They will leave this exercise having an appreciation of what your home is worth, how you afford it, and that you are constantly looking for opportunities to lower that monthly outlay if the economic circumstances should change. If you pardon the pun, that is "interest"-ing!
Tom Henske is a Westport resident and partner with Lenox Advisors, a wealth management firm with offices in New York and Stamford. His "Money-Smart Kids" appears every other Wednesday. He can be reached at: email@example.com.