There might be many layers of complication behind the definition of mortgages, so let’s start slow and take very tiny steps toward understanding it. Buying a decent home is a gigantic move and many people don’t have enough capital to even think of making it. At some point, banks decided to help with the problem and started giving away large amounts of money to people so they can buy houses.
This way people can make a real estate purchase and pay back the money monthly over a long period of time. Banks themselves make money from giving away these loans because they charge interest on them. So basically, a mortgage is a kind of loan given away by banks to people to help them buy a house. Simple as that!
Now let’s break it down into smaller steps and find out how we can explain it to our kids:
Talking about mortgages
Knowing mortgages can be a part of every household, makes it very important to be taught and explained to children. As boring as it might be, if you want to have financially literate kids, this subject also has to be a part of their financial education.
There are different ways you can bring up the idea of mortgages so you teach it thoroughly, some of which will be discussed further on in this article.
Different types of mortgages
Understanding different types of mortgages can help have a better perspective on what it is and how it works. Here are some of the types that are commonly seen:
Every mortgage has an interest rate which is set as a percentage of the amount of money you’ve taken on debt.
In these types of mortgages the interest rate is not fixed and it goes up and down every month. While they are usually cheaper than fixed-rate, they’re a bit risky because if the rates rocket, it might be hard to keep up with payments.
In repayment of mortgages, you pay both the amount of money that was lent to you and the interest that was added to it on a monthly basis.
As it’s clear from the name, with interest-only mortgages you only pay the interest and not the amount of money you borrowed. While interest-only mortgages are cheaper, you will still end up owing the money you borrowed at the end of the term.
Sometimes the government helps people get loans that might not usually be qualified for, in other terms backs them up!
In many cities, the amount of money allowed to borrow is not even close to enough to buy a house. So, there is an extra-large jumbo available to only a few borrowers to help them cover the more expensive houses.
Many people borrow money to buy real estate they don’t want to live in, as a sense of investment. In that situation, they will have to take out a buy-to-let mortgage.
Practical ways to teach kids about mortgages
There are a few smart techniques you can use to help children understand mortgages in a less boring matter. Take a look and choose the right way accordingly.
Pocket Money Mortgage
Calculate the amount of pocket money they receive every year, and triple it! Offer them that amount as a loan they’d have to pay back from their pocket money over the course of the next few years and see how they’d respond to that 🙂
Discuss your own mortgages
If you’re currently undergoing some mortgage, then it might be a great idea to show them the paperwork and the money you’ve borrowed and how you’re paying it back. This is the most practical way you can bring up this idea.
Monopoly is one of the smartest financial board games ever to exist. You can use it both to play with your kids and have a deep conversation about how mortgages can help you build better opportunities if thought through.
Mortgages are usually a part of every household and should be thoroughly explained to kids as well. Take your time and make sure to teach them about the value of it and how borrowing money can sometimes do more good than harm.