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Mortgages for Teens

Mortgages can be a little tough to understand – here are the basics!


You’re probably wondering what’s a mortgage, right? Well, let’s break it down.

Simply put, a mortgage is a loan you take out to buy property or land. Most run for 30 years, but the term can be shorter or longer.

Now, the loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up your repayments, the lender can repossess your house and sell it to get their money back. Sounds intense, doesn’t it? But don’t worry, it’s all part of the adulting process.

What Are The Different Types of Mortgages?

There are two main types of mortgages: fixed rate and adjustable rate. In a fixed-rate mortgage, your interest rate stays the same for a set period of time. This means your monthly payment isn’t going to change, making it easier to budget. On the other hand, an adjustable-rate mortgage has a fluctuating interest rate. The initial rate is usually lower, but it can rise or fall over time.

But there’s more to it than just the standard fixed-rate or adjustable-rate options. Different mortgages cater to different needs and financial circumstances, so it’s crucial you understand which type suits you best.

To give you a clear picture, here are three common types of mortgages:

  1. Fixed-Rate Mortgages: This is the most traditional type of mortgage. You’ll pay a constant rate of interest over the entire loan period, making your monthly payments predictable.
  2. Adjustable-Rate Mortgages (ARMs): With ARMs, the interest rate can change over time, usually after an initial fixed period. This means your payments could go up or down, depending on market conditions.
  3. Interest-Only Mortgages: Here, you only pay the interest on the loan for a certain period. After this period, you’ll start paying both the principal and the interest.

The Mortgage Process

It’s crucial to grasp the mortgage process before you start house hunting. This knowledge will put you in the driver’s seat and help you make the right decisions.

First, you’ll need to get pre-approved for a mortgage. This means a lender has looked at your financial situation and decided how much they’re willing to lend you. Remember, just because you’re pre-approved doesn’t mean you need to borrow the maximum amount.

Next, you’ll start house hunting. Once you’ve found the one, you’ll make an offer. If it’s accepted, you’ll move forward with the mortgage application. This involves providing documents like pay stubs and bank statements. You’ll also need to get the property appraised to ensure it’s worth the loan amount.

Your lender will then review your application. If they approve it, you’ll close on your loan, and the house is yours. But don’t forget about mortgage payments! These need to be made on time every month.

This might seem overwhelming, but don’t fret. By understanding the mortgage process, you’re already on your way to becoming a savvy homeowner.

Down Payments Explained

When buying a house, you’ll typically need to make a down payment, which is a percentage of the home’s cost that you pay upfront. This amount is crucial because it directly affects your monthly mortgage payments. The bigger your down payment, the smaller your mortgage will be, which means you’ll have smaller, more manageable monthly payments.

Now, you might be wondering, ‘How much should I put down?’ Well, that depends on several factors. But to give you a general idea, here’s a list:

  1. Standard Down Payment: Most lenders expect a 20% down payment. For a $200,000 house, that’s $40,000.
  2. Low Down Payment Options: Some loan programs, like FHA loans, allow down payments as low as 3.5%. But remember, lower down payment means higher monthly payments.
  3. No Down Payment: Some programs, like the VA loan program for veterans, allow you to buy a house with no down payment. But these programs are not available to everyone.

How Long Is a Mortgage For?

You’re probably curious about how long you’ll be making those monthly payments on your mortgage, aren’t you? Well, that’s a great question. The length of a mortgage can vary depending on the type you choose. Typically, you’ll find yourself locking into either a 15-year or a 30-year term.

In general, a 15-year mortgage means higher monthly payments, but you’ll be debt-free faster. You’ll also save a ton of money on interest. On the flip side, a 30-year mortgage will have lower monthly payments, but you’ll be paying it off for double the time. That means you’ll end up paying more in interest over the life of the loan.

Mortgage Payments Explained

You’ve learned about the length of a mortgage, but what about the payments you’ll make over that time?

Let’s break down the components of a mortgage payment and take a look at the schedule you’ll be following.

Understanding these elements can help you manage your finances better and be prepared for what’s to come in your home-buying journey.

Mortgage Payment Components

It’s important to understand that a mortgage payment is usually made up of four components: principal, interest, taxes, and insurance.

The principal is the original amount you borrowed to buy your home. Each payment gradually reduces this principal.

Interest is what the lender charges for lending you the money. It’s calculated based on the outstanding principal balance.

Taxes are levied by your local government and usually go towards community services like schools and roads.

Insurance can include homeowners insurance to protect against damage and liability, and mortgage insurance if your down payment was less than 20%.

The Payment Schedule

We’ll now delve into the payment schedule of your mortgage, which outlines when and how much you need to pay. This schedule is a crucial part of your agreement with the lender. It lays out the exact dates you’ve got to make your payments.

Typically, you’ll make monthly payments, which include both the principal and the interest. It’s important to stick to this schedule, as late or missed payments can lead to penalties and negatively impact your credit score.

You’re also given an ‘amortization schedule.’ This shows how much of each payment goes towards the interest and how much towards the principal balance. Over time, you’ll notice that more of your payment goes towards reducing the principal balance.

When Should You Get a Mortgage?

Determining the right time to get a mortgage can be tricky, but don’t worry; there are some indicators that can guide your decision. It’s about understanding your financial situation and the housing market.

Here are three key factors to consider:

  1. Your Financial Stability: You must have a steady income and a good credit score. Lenders will check your employment history, and they prefer borrowers who’ve been with the same employer for at least two years. Also, the better your credit score, the lower the interest rate you’ll get.
  2. Current Interest Rates: Keep an eye on the interest rates. They fluctuate, and a lower rate can save you a significant amount of money over the life of your mortgage. It’s beneficial to get a mortgage when rates are low.
  3. Price of Homes: Lastly, consider the housing market. If house prices are high, it might be worth waiting for them to drop. However, don’t let this solely guide your decision because predicting housing market trends can be challenging.

How Your Parents Can Help You Learn More About Mortgages

Now that you’ve got a handle on when it might be time to get a mortgage, let’s explore how your parents can play a pivotal role in helping you grasp the intricacies of this seemingly complex financial concept.

Believe it or not, your parents can be a treasure trove of mortgage knowledge. They’ve been there, done that, and they probably have a thing or two to teach you. Start by simply asking them about their own mortgage experiences. They can provide you with firsthand insights that you won’t find in any textbook.

You might be surprised at how much you can learn from their triumphs and, yes, even their mistakes. Ask about what they wish they’d known before they took on their mortgage. You’ll get a glimpse into the realities of homeownership that can be invaluable when you’re ready to take that step yourself.

Those Are The Basics!

So, you’re starting to get the hang of this mortgage business, right? It’s a bit like learning to drive – you might stall a couple of times, but with practice, it becomes second nature.

Just remember, the average American pays off their mortgage in 30 years, so it’s a long ride. But with your parents by your side, learning the ropes, you’re sure to hit the road running.

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About the Author

David McCurrach

David McCurrach is the founder of Kids' Money. Following a career working in finance for several banks and credit unions, David started Kids' Money in 1995 and has since published three books on kids' financial literacy and allowance programs.

Last updated on: November 13, 2023