Traditional wisdom encourages you to pay off your mortgage faster by taking a 15-year mortgage instead of 30 years, or by paying an additional principal amount each month. However, these actions have risks. If you encounter financial difficulties and don’t have an emergency (reserve) fund, you could face foreclosure. Be sure your emergency fund has enough to cover several months of mortgage payments to avoid losing your home.
Some financial advisors suggest that if your reserve fund earns a rate greater than your mortgage rate (also taking into account tax benefits), you may decide to invest rather than pay down your mortgage. This approach could give more flexibility when encountering an economic downturn, which might include refinancing your mortgage at a lower interest rate.
Also, beware of organizations promising to help you make additional mortgage payments. You can do this on your own, without the fee they will likely charge.
For additional information on paying off your mortgage early, click here.
Have students talk to others about the benefits and drawbacks of paying off a mortgage early.
Have students develop a visual to compare paying off a mortgage early with saving and investing additional funds instead.
What are the benefits and drawbacks of paying off a mortgage early?
Describe actions to take when trying to decide if to pay off a mortgage early.
To spend less and save more, consider an “anchoring” system. One example of an anchor is the price of an item to determine if that is an appropriate amount of money to spend for the item.
Anchors prevent shoppers from being overwhelmed by the many choices, prices, and features. You can create your own anchors by:
setting the maximum price you are willing to spend for an item.
considering the value of an item in relation to the number of hours you have to work to pay for it.
comparing the cost in relation to another item. If you buy coffee costing $2.50 a cup and want a sweater costing $50, view the sweater as costing 20 cups of coffee. Your “coffee” anchor will help you determine how valuable the sweater is to you.
When buying a home, you may be encouraged to look at properties outside your price range. Anchoring yourself at a price limit will avoid overspending, make you feel more in control, and encourage wiser financial decisions.
For additional information on financial anchoring, click here.
Have students talk to several people to obtain information about how they determine the price they are willing to pay for an item.
Have students create a video presentation that demonstrates various anchoring methods.
How might anchoring help improve personal financial literacy and money management activities?
Describe anchors people might used to determine the price they would be willing to pay for an item.
Many recent college graduates choose to rent expensive, upscale apartments rather than putting money into savings. Their “fear of missing out” (FOMO) on being “close to the action” or luxury-living amenities comes at a cost, with high demand for these units resulting in spiraling monthly rents. To cover these higher costs, “apartment loans” are now available in several urban areas.
Similar to the high-risk mortgages that triggered the financial crisis in 2008, apartment loans may be viewed as predatory lending. Renters may borrow up to $15,000 with no interest for the first six months, but then encounter an annual interest rate of 15-17 percent. Some justify these loans in that the costs are lower than payday lending.
If you have to take out a loan to pay the rent for an apartment…you CAN’T afford to live there. Your ability to build wealth and long-term financial security will depend on living within your income.
For additional information on apartment loans, click here.
Have students conduct a survey of renters to determine actions they took to determine the location and cost of obtaining an apartment.
Have students create a visual presentation with the dangers of apartment loans.
What actions might be considered to avoid apartment loans?
Describe financial and personal concerns associated with apartment loans.
While car ownership has been a cultural milestone in our society, this tradition is diminishing with a trend toward renting or borrowing rather than owning. This situation is partially related to fewer teenagers opting to obtain a driver’s license. Also, fewer young people are buying homes, giving preference to the flexibility of renting.
The owning of “stuff” is shifting toward “decluttering” and choosing instead to rent items as needed. A strong belief that overconsumption is putting our planet at risk is driving the rise of the sharing economy. In addition, there is a growing trust to value exchanging items with “real people” rather than buying from major companies.
In addition to Zipcar, which rents vehicles by the hour, other rental business models include:
Ann Taylor’s Infinite Style service that allows a person, for a $95 monthly fee, to rent up to three garments at a time.
SnapGoods rents cameras, power tools and home appliances, such as blenders.
Frankfurt airport has a service that allows travelers to store winter coats when flying to warmer climates. Other businesses are considering a service to rent cold weather clothing to travelers arriving from tropical areas.
Since about one-third of new vehicles are leased, Cadillac created the “Book By Cadillac” program allowing a person to exchange up to 18 vehicles a year.
The many empty stores in malls create opportunities for “swap meets” and “rental fairs” for various products, using these spaces to also build connections in the local community.
For additional information on renting instead of buying, click here.
Have students locate examples of sharing economy businesses and rental companies in your community and online.
Have students talk to others to obtain ideas for new types of rental businesses.
What do you believe are the benefits and drawbacks of renting instead of owning?
Describe actions that might be taken to determine needs and ideas for rental businesses in a community.
While home ownership is often promoted as part of the “American Dream” and a sound financial decision, another point of view might be considered. Home ownership may not be for everyone when considering these drawbacks:
Home ownership can be a money drain. Mortgage payments and other costs, such as property taxes, maintenance, repair, insurance, and utilities can add up to a significant portion of a household budget.
The mortgage tax deduction may not be worth it. If you do not itemize on your taxes, you will not get the benefit of this deduction.
Consider the “rent-price ratio.” This analysis is determined by dividing the average home sale price by the average annual rent. A ratio of 1 to 15 is considered a range when it is better to buy than rent. Between 16 to 20, you are getting in to risky buy territory. Over 21, it may be better to rent than buy. Be sure to also consider how much space you need. Homes are usually larger than apartments.
People often buy a larger house than needed, resulting in higher mortgage, insurance, energy, and maintenance costs as well as higher property taxes.
For additional information on the financial drawbacks of home ownership, click here.
Have students ask homeowners for suggestions they would offer to people planning to buy.
Have students create a financial analysis comparing renting and buying for comparable housing.
What factors might you overlooked when deciding to buy a home?
How you decide whether to rent or buy your housing?
While more people are renting in recent years due to various economic and household situations, home ownership is still a financial goal for many. A financial comparison between renting and buying often overlooks various factors. An online calculator may be used to consider buying items such as the opportunity cost of investing your down payment (along with the taxes on capital gains), condo or home association fees, maintenance costs, and, of course, the tax benefits of property taxes and mortgage interest. On the rental side, the calculator considers initial costs (such as a security deposit and any broker’s fee) along with the opportunity costs of the initial costs and recurring costs, such as renter’s insurance.
For additional information on calculating the renting vs. buying your home, click here.
Have students ask people to describe factors that affected whether they own or rent their housing.
Have students conduct a personal financial analysis for renting and buying a place to live.
What are benefits and drawbacks of renting and buying a place to live?
Describe financial factors that might be overlooked when comparing renting and buying a place to live.
“Finally, simple mortgage calculators that anyone can use.”
The mortgage calculators on this website can help home buyers estimate how much their monthly payments will be when they purchase a home. To use the calculator, enter the following information and then click “Calculate.” It’s that simple.
Loan Start Date
A Percentage for Property Tax
A Percentage for Private Mortgage Insurance
In addition, there is information to help homebuyers compare a 30-year and a 15-year mortgage, make a rent or buy decision, and valuable information about other home purchase decisions.
You may want to use the information in this blog post and the original article to
Stress the importance of finding the right mortgage when purchasing a home.
Calculate monthly home mortgage payments when different interest rates are chosen.
Illustrate the difference for the total repayment amount and monthly payment amount when the home buyer chooses a 15 year or 30 year mortgage.
How important is choosing the right mortgage when you buy a home?
Using the mortgage calculator at http://www.mortgagecalculator.org, determine the monthly payment for a 30-year loan for $180,000 if the interest rate is 5 percent. Assume the home purchase price is $210,000, property tax is 1.5 percent, and the PMI is 0.5 percent.
What is the monthly payment for the above loan if the interest rate decreases to 4 percent? Over the 30-year period, how much did you save if the interest rate is 4 percent compared to 5 percent?
The most popular reverse mortgage program is the Home Equity Conversion Mortgage (HECM), which is insured by Housing and Urban Development (HUD).
New rules from HUD add protections for certain surviving spouses after the death of a reverse mortgage borrower. Until recently, if the non-borrower spouse was not on the loan, he or she was not entitled to remain in the property following the death of the borrower. But under HUD’s new rules, non-borrowing, surviving spouse can remain in the home if specific conditions are met. These changes apply to reverse mortgage loans in which the borrowing spouse applied for a reverse mortgage before August 2014. In addition, the couple must have resided in the property as their principal residence throughout the duration of the HECM, and taxes, property insurance and any other special assessments that may be required by local or state law must have been paid.
The concern regarding non-borrowing spouses has been a source of many reverse mortgage issues. Here’s why: The amount of money a reverse mortgage borrower can draw is based in part on the age of the youngest borrower—and unless all borrowers are 62 or over, they would not qualify for a reverse mortgage.
Ask students to comment on the statement: “While a reverse mortgage can be used to supplement monthly income, some borrowers may face unintended obstacles and consequences”. What might be those consequences?
Are the new rules from HUD effective in protecting senior citizens? Why or why not?
Why should you talk to a qualified professional before deciding to get a reverse mortgage?
Where can you find HUD-approved HECM Counseling Agencies near you?