In our previous financial life lessons, we showed you how to teach your kids about debt. Specifically: to help them understand that debt is a “promise to pay” which usually includes a fee in the form of interest. Now, they should be able to grasp the following example that explains what a mortgage is and how it works — an important concept for them as they get older.
Teaching about mortgages: an important financial life lesson
Now that we understand that debt is a promise to pay back — with interest — someone that loaned us money, let’s look at the biggest example of debt most adults carry: a mortgage.
A mortgage is just a fancy word for debt that is used to borrow money for buying a house. Almost every adult that buys a house does not have enough money to pay for the house all at once.
Helping your kids to understand the true cost of a home
Houses can cost between $90,000 to $300,000 in most cases, but this can vary quite a bit depending on where you live. Homes could cost a lot more! That is more than most adults will make in a whole year, so they need help to buy something so expensive. To do so, they go to the bank and ask to borrow the money. The borrower promises to pay the bank back with interest over the next 15 to 30 years. Usually, these payments are paid monthly.
This debt does not go away until it is completely repaid through monthly payments over many years or by selling the house and using the money to pay off the mortgage.
Therefore, adults that own houses must budget a “house payment” every month. They know that if they do not pay this debt on time, they will have broken their promise to pay the person that loaned them money.
Questions to ask
To review your kids’ understanding of these concepts, here are some questions you can ask:
- How would you feel if you broke your “promise to pay”?
- How would you feel if someone you loaned money to broke their “promise to pay” you?
- What do you think the bank would do if an adult stopped paying their mortgage back?
Tips for parents
If you have a mortgage, share the details with your kiddos. What did you borrow? How much interest do you have to pay? What’s your monthly payment that you have to budget? When will the debt be paid off? Sharing some of this information with your kids can help them to further understand how mortgages work and the impact it will have on their future financial lives.
Next lesson we’ll transition to the accumulation of consumer debt and its impact.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.