In Washington, D.C. today, much is being made of college student loan policy as recent graduates are faced with the sometimes unpredictable realities of borrowing. Emergence of the student loan "time bomb" should raise interest in increasing credit literacy at the high school level, so people learn earlier about borrowing.
Every high school has completion requirements intended to set kids up for the next stage of their lives, and yet there is a stunning lack of financial literacy among graduating seniors. This lack of knowledge became clear during the mortgage crisis, as stories were shared in the media of devastation by people (some far removed from their high school years) who did not understand the mortgage agreement they signed. Since there are many avenues a student can follow upon graduation, (job, trade school, military, etc.) high school is the last, best opportunity for a foundation of financial literacy in our kids.
Budget Is The Foundation To Borrowing
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The lending industry's response to the mortgage crisis of 2008 has been a shift to making credit decisions on an individual basis. with consideration of a number of factors. As 18 year-olds are learning calculus, they are qualified to be taught the impact of paying points and the effect of interest rates on affordability. This type of practical education can help those entering adulthood qualify for lower borrowing costs down the road, and gives the ability to analyze fixed rate loans versus ARM's.
A budget is the backbone of any successful financial endeavor, whether managing a household, or a business. Mortgage applications are all about budgeting. A better informed generation of borrowers make for a more stable U.S. economy, as they are more likely to understand their mortgage choices, and are less susceptible to bad advice.
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Buying or Renting
A decision graduates should be trained to address early in their careers is whether they should rent or buy. Making this determination depends on several factors, like how fast prices and rents rise and how long you stay in your home. Income and property tax brackets serve as additional considerations. Here is an example that illustrates that there is no one-size-fits-all answer to the rent versus buy question: A home price of $300,000 and a 10% down payment against comparable average rent of $1,800 makes owning financially better for a consumer inside of just two years. But move rent down to $1,400 per month things tip decidedly toward renting, unless you know your going to be in the house more than 12 years.
Borrowing money is a personal decision that can be a good strategy or become a burden. Even with new regulations intended to protect borrowers, people should approach credit with a buyer beware attitude. Teaching our young people to think for themselves when it comes to credit, equips them to make better decisions that will have a significant impact on their life. And as we have seen, this makes for a more stable economy.
If you have questions about mortgages or qualifying to buy a home, you can reach me at bradt@whatsexpected.com.
