When you buy your first house, it’s a thrilling time. It’s a little scary, but it’s still a lot of fun. You’ve probably bought your first home, second home or even third one. So you’re familiar with the process. There’s a new language in real estate and mortgages. Some words are only used within the real estate world. The word “mortgage” is a good example. Mortgage is also used in other contexts, but it is most commonly associated with real estate. You may remember when you bought your first house. You were probably excited and anxious, but as the business side of the deal begins to take shape it takes on an entirely new dimension.
What do you do when your eldest calls you at dinner and says, “I’m ready to stop renting, and I want to buy that house I saw on the street.”? There are many reactions, but the most common is to tell your child it’s more than just excitement. You’ll also find some boring things. For starters, there’s a lot of paperwork to sign.
Not only will they need money to pay for the down payment, but also for closing costs. The ‘hard’ costs, such as an appraisal or credit report, but also the’soft’ costs like property taxes and insurance. Prepaid interest can also be a cost. Prepaid interest may need a short explanation. When a monthly mortgage payment is made, the payment is applied according to the number days owned the previous month. If someone closes and sells a home on 31st, the first mortgage payment will include that day. If you close on the 15th of the month, 15 days’ interest will be collected. Rent payments are applied to the next month.
Your children also need to understand that a mortgage is an entirely different type of commitment. You can’t just walk away. Renting allows you to move on to another property after the lease period is over. You’re required to hold a mortgage until you sell the house or decide to refinance. There will still be a mortgage. Lastly, the responsibility for property taxes and insurance falls to the children and not the landlord.
Do not discourage your children from buying. Just let them know that there is more to it than the down payment.