Having a family discussion about how to get a home loan may not rank at the top of the to-do list as a parent. But it’s a component of one of the most important talks you’ll have with your teen.
Financial management is critical for every teenager to learn. Instilling good knowledge and skills now may help them avoid problems later. Start by sticking to the basics, and then expand their knowledge to include other topics that may apply to them.
If you’re looking for help on how to get a home loan, our team at TwinCity Lending is just a call away. Give us a call today.
Teach Your Kids About Credit First
An excellent place to start is with a solid understanding of credit. When your son or daughter reaches college and begins to use credit, you want them to make empowering decisions. Unfortunately, from 2004 through 2009, college students saw median credit card debt rise by 74 percent.
You can’t rely on schools to teach students this information, either. Only 17 states require high schools to include a course on personal finance.
Start the conversation with a definition of what credit is, why we should use it, and why we shouldn’t overuse it. Here are some points to talk about:
- Credit is beneficial because using it wisely shows lenders that a person is a reasonable credit risk. That means they may qualify for loans in the future.
- Talk about the burden that credit creates when we overuse it. Discuss the cost of using credit, including interest, and how that makes a simple purchase expensive.
- Also talk about how to choose credit based on interest rates and fees, rather than the available limit.
Talk About How to Get a Home Loan and the Opportunities It Provides
Most consumers need to use a home loan to purchase a house. A great place to start this conversation is with an explanation of the down payment. Many lenders require a down payment, but a young person may have no idea what that is or how they could come up with so much cash.
This is a great time to discuss savings vehicles that can help your children achieve this goal. You also can explain other aspects of home loans, such as insurance and interest.
What Is a Mortgage Anyway?
Be sure you also explain exactly what a mortgage is. Teach your kids that it is a lending tool for buying a home, also known as a home loan. The value of the house works as the collateral for the loan. That means if the borrower stops making payments, they can lose possession of the property. The lender owns the home until the borrower repays the loan
For older students, it can also be valuable to talk about different types of mortgages. This topic should include FHA loans and VA loans for veterans. Discuss the value of buying a home and why real estate tends to be a solid financial decision for many people. This conversation is also a great way to bring up the importance of buying versus renting a home.
Interest Rates on Home Loans
In your initial discussion about credit, you should be explaining how interest rates work. And it is critical to teach young people what they need to do to qualify for low interest rates later in life. They need to understand how to maintain a good credit score in the years leading up to buying a home. This conversation should include the fact that the actual amount you pay for a home is significantly higher than the sale price, due to interest amounts.
How Does Home Equity Work?
Home equity is an important topic to cover with your teens and young adults. It helps to open their eyes to how they can use credit in their favor. Home equity, which is the amount of the home’s value that is not under a mortgage, is a powerful asset. For example, some people pay off their student loans or other debts using the equity in their home.
What makes equity so important is that it tends to build up over time. This growth builds funds that a homeowner can access for other needs. With lower interest rates and qualifications, equity can be helpful for the lifetime of owning the home.
What Makes a Lender Offer a Home Loan to a Consumer?
Drill into your children the value and importance of good credit. Are you sensing a theme here? You can pick up an ad or browse through a real estate website with your child to see the value of various homes. That’s a big number for most teens. Why should a bank loan that enormous amount of money to a consumer to buy a home?
This conversation should include the idea of risk for the financial institution. Lenders offer loans to consumers who are a good risk. That is, they are willing to loan you the money if they feel confident you can pay it back. What makes a borrower a good risk?
- Steady employment
- A good credit score
- A low debt-to-income ratio
- Good references
- A larger down payment
How to Pay Off Student Loans – Making the Connection
As college tuition and fees escalate, your teen may be feeling anxious about being able to afford higher education. If your child is set up for success in owning a home, they will have options for paying off student loans with their home equity.
A student loan conversation gives you the chance to talk to your teen about how to pay off any loan. They should learn that it is vital to pay more than the monthly payment and always pay on time. Learning how expensive it can be to pay off debt can help your teen see the value in keeping it in check throughout their lifetime.
You’re Not in This Process on Your Own – Let Us Help You
Whether you’re teaching your child how to get a home loan, pay down debt, or use credit, one thing is for sure. It is all critical information. And for your own lending needs, put your trust in TwinCity Lending. Contact our dedicated team to learn more about how we support you and your growing children on your financial journey.
Call TwinCity Lending now for a free mortgage review at 651-303-4236 or learn more about our services.