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This lesson begins on Page 146 of the Instructor’s Guide so let’s turn to that now.
You can see on the five-day pacing guide that the Presentation of Content for this lesson has been segmented because there’s a lot of material to cover. You might even consider, if you have the instructional time, splitting the content into 3 days so students don’t get overwhelmed.
The Instructional Resource for this lesson is Zillow.com or MichaelBlueJay.com. In this lesson, you’ll demonstrate the financial diferences between renting vs. buying, and you’ll demonstrate for students at what point renting becomes more expensive than buying a home. That’s what the Michael Blue Jay calculator does and the Zillow Calculator, and they’re easy to use.
The other instructional resource for this lesson is for demonstrating loan amortization and that is mortgagecalculator.org. You could really use any amortization calculator but this is a good one that enables you to display an amortization schedule so that students can see that over time, a mortgage is paid down, which increases the owner’s equity in the property and that’s one of the ways wealth is built through homeownership.
The Online Resource for this lesson, which is a resource students might want to turn to once and awhile in their lives and that is realtor.com. There’s a lot of useful information on this website and I was surprised at how much of the information on this site is geared toward renting, and particularly toward young renters with many rental concepts explained in simple terms. Students will soon be young renters, so they might want to bookmark that site as a resource.
As an aside: I couldn’t cover everything I wanted to cover in this lesson. If I did we’d be on it for three weeks. Because this lesson is within the theme of Building Wealth, there isn’t a great deal of focus on renting because that is not a way to build wealth, though we’ll talk more about that in a bit. I want to point out some activities you can do with students if you want to focus on helping them learn how to be successful renters. One activity is to have students research and explore tenants’ rights. We’ve probably all had a bad landlord at one time or another or a bad experience renting. Like the landlord who doesn’t follow through on promises to fix something, or who keeps your security deposit when you move out even though you left the place immaculate and owe no rent — or like my former creepy landlord who’d let himself into our apartment while we were at work and go through our stuf. Students should know their rights as tenants. Those rights vary from state to state, but all states have a tenants’ rights website. Just search “residential tenant’s rights” or “renters rights” and the name of your state. Some states actually have a downloadable pdf authored by their consumer afairs division students can read and learn! You can also go to online legal sites like Nolo.com.
You might want to draft out a variety of scenarios such as the ones I mentioned above or maybe a landlord who suddenly raises the rent or tells the tenant they have to move in a week, or what are a tenants rights if there’s been no hot water for a week — things like that. The students have to research their rights within a particular situation. We want them to know that if and when something goes sideways in a tenancy, there are rules that govern the resolution and courts are usually pretty sympathetic to the residential tenant. Anyway that is a way to expand or diferentiate this important topic.
Another thing you can do which would be really informative is invite a residential property manager into your classroom to talk to students about responsible renting and how to best handle a problem of one arises. These people are not hard to find — any large apartment complex in your area will have a manager or will be afliated with a management company, and I’m sure you could easily find some one to come into your classroom as a guest speaker. You can also try calling a local real estate ofce but they are often just leasing agents, not property managers. These things are not directly impacting their financial literacy, but important nonetheless as life skills.
Finally another activity you could do to boost the rental/tenancy objectives would be to download a lease or rental application and a standard residential rental agreement. Have the students role play coming to see an apartment, talking to the landlord about it, figuring out if they can aford the apartment using the afordability ratios they learn in the lesson, completing the rental application, reading the lease agreement, and doing a walk through with the landlord on the move-in, taking pictures of and writing down any physical problems with the property.
The What Does That Mean? vocabulary list is on Page 147. It is pretty extensive. That’s because real estate has a language all its own. An important part of making financial decisions about real estate is understanding the language of real estate, hence the larger vocabulary list for this lesson.
Gaining Attention on Page 148 engages students in sort of a light banter that will hopefully get them into the spirit of the lesson, asking them whether they have ever thought about or plan to own their own home, or they plan to rent their own home. What kind of home do they envision themselves in? Are you an urban high-rise dweller, or would you like to live out in the country in a single family home, or something letting them talk about their homeownership or housing dreams.
And speaking of homeownership dreams, below on Page 148 there is within the Presentation of Content, there is a discussion of the American dream in decline. Homeownership has always been considered a significant part of The American Dream partly because historically, homeownership has been one of the best ways to build wealth in America. You can about that on Page 148. In the last few years, there has been a significant uptick in the number of Americans who rent their home. There are plenty of reasons why people rent and you will read about some of those in the lesson. Being financially literate means understanding how wealth builds very diferently for homeowners and renters. When the time comes, your students should know and understand this in order to make an informed decision about whether they’ll want to rent or pursue homeownership.
We begin the lesson with a survey of some of the diferent types of housing people live in and a general discussion of the process of buying a home. We talk about making the purchase, and the meaning and purpose of escrow, and we also have a short section on title including a little bit about liens and encumbrances. These things such as knowledge of easements and liens is not essential to a person’s financial literacy, but they are common terms that students may encounter in everyday life and since they’re not hard to understand, I thought they should be included them in the materials.
However, understanding the home loan or mortgage is essential to financial literacy. So, in this lesson we spend quite a bit of time on that topic. As you’ll recall in the last lesson, The Credit Conundrum, we discussed good and bad debt. A mortgage is not considered consumer debt. It is considered good debt because of the potential that homeownership provides for building wealth. Students should understand that if they buy a home one day, it’s almost for certain they’ll apply for a home loan to pay for it. It is the home loan plus the down payment that covers the cost of the home which is called the purchase price. On Page 151, we talk about two diferent types of mortgages. Students do not have to become mortgage experts in this lesson but they should know that there are fixed rate mortgages and adjustable rate mortgages. They should be able to explain the basic diferences between the two.
I call your attention to Qualifying for a Mortgage on Page 151, this is a good place to stop and chat with students about planning for the future and making good financial decisions. In the last chapter, The Credit Conundrum, students learned about credit scores and credit reports. If they have dreams of being a homeowner one day, they really should pay close attention to being good, responsible debtors. They must try to maintain good credit scores. They need to avoid running up a bunch of consumer debt, and also keep an eye on their debt to income ratio. They learned about DTIs that in the last lesson and that is one thing home loan lender will look to determine the buyer’s afordability. In terms of homeownership the word affordability isn’t just a toss out — it is actually a ratio used by lenders to determine the amount of home loan payment a borrower can afford. A lender looks at how much debt a person has, how much income they make, and what they can aford for housing.
Let’s discuss the financial benefits and challenges of homeownership. In my opinion, the number one benefit of home ownership is the ability to build wealth relatively painlessly. On Page 151, we talk about how wealth builds in a home. The portion of the value of a home that is unencumbered by the home loan is called equity. Equity translates into the homeowner’s wealth. So if you have a house that’s valued at $200,000 and you have a $100,000 mortgage on it, the owner’s equity is $100,000 and that translates directly into wealth. Sometimes people think that wealth in a home builds only if the home’s value rises. That’s one way that equity increases in a home but there are some other ways too. Obviously, equity builds immediately by making a down payment. Secondly, the amortization of the loan slowly but steadily creates equity over the years because it’s like saving a little money every month. Appreciation is when housing prices rise in the area. Obviously this builds wealth. Finally, value can also be built by making improvements to property. The basics of those are explained on Pages 151 and 152.
That being said, we also have to look at depreciation. In 2008, the U.S. saw a rare decline in the value of homes as the result of the 2008 market crash. But most homeowners in the U.S. have done pretty well through homeownership and most have been able to build wealth. A fun way demonstrate some of the points about home improvement and sweat equity is assigning students to watch some of the HGTV shows such as Property Brothers, Love It or List It, or Fixer Upper. In those shows, they usually talk about the value of the home before the improvements were made, and the value of the home after the improvements were made so the students can understand a bit of the concept of sweat equity.
At this point in the lesson, it’s a good time to break out our appreciation calculator and demonstrate for students how homes can appreciate over the years and how appreciation in a home’s value translates into wealth for the homeowner. Currently, the average rate of appreciation in the U.S. is about 3% but it varies a lot around the country and it’s obviously tied to housing demand. In some places, there’s a very high housing demand which drives prices up, and in some places, the housing demand is not so great which keeps prices flat.
Continuing on Page 152 are some other benefits of homeownership. One is a tax benefit, in the form of a mortgage deduction. There are also life style security and financial stability benefits that arise from homeownership.
Moving to Page 153, we look at some of the downsides or challenges of homeownership. Probably, the most difcult thing about home ownership is getting a down payment together for the purchase. Down payments are usually about 20-30% of the purchase price and with today’s home prices, that’s a lot of money that has to be saved. Hard to do, yes, but not impossible.This crosses into the area of setting financial goals. If students want to own their own home one day, they should project a down payment target and create a savings plan for reaching that financial goal. It can take several years and, as we learned in earlier lessons, compounding is time-sensitive, so the earlier they start saving, the faster or sooner they’ll reach their goal.
Beginning on Page 153, we explore renting. The renting process is not as complicated as buying a home, but there are pitfalls a financially-literate person should be aware of. There’s a section on terms and what should be covered in a lease. Vagueness in a lease or rental agreement is a bad thing. Leases and rental agreements should be carefully reviewed for clarity about who is responsible for what, for dates when rent and other payments are due, and what is the procedure for terminating a lease or rental agreement. A tenant should understand exactly what their responsibilities are for maintaining the property and what the landlord’s responsibilities are.
Affordability is a concept applied to renters too. Generally, experts suggest that no more than 30% of net pay, which is take-home pay, should be spent on rent.
Students should be aware that when they sign a lease agreement, they’re responsible for the entire rent payment, not just the portion they agreed to with their roommate. So they should make a point of selecting roommates who are financially responsible and reliable people, with a steady job or income. In a later, lesson we’ll explore shared debt and financial obligations in depth.
There are some benefits to renting, which are pointed out on Page 155. But the big question is: how do they stack up against the financial benefits of owning a home? On Pages 155 and 156 are some things that a financially literate person would consider when deciding whether to buy or rent their home. Remember, homeowners build equity because the home loan amortizes. It’s paid down over time and that builds wealth. It basically forces you to save money. However, none — zero amount — of the money paid to a landlord builds wealth for a renter. Renters can build wealth like a homeowner but only if they follow a disciplined and regular strategy of investing the money that they’re saving by renting. If they don’t do this, they will not build wealth as well and as steadily as a homeowner does. So if you rent, you have to be extra diligent about saving and investing, because it is not moving you ahead financially.
On Page 156, there’s a section titled Cost Over Time. Renting almost always starts out as the cheapest living arrangement. That makes it very attractive. But it can actually end up more expensive than buying a home. This all has to do with comparing the cost of renting with the cost of buying over time. When that happens — that is the exact point on the homeownership timeline buying becomes the cheaper option — difers all over the country because housing and rental costs are diferent. But there plenty of good rent vs. buy calculators online so students can explore this concept.
On to Page 157 is The Big Picture which restates the main points of the lesson. Under Let’s Practice we have our three activities: The first is Jenna and Brenna Go House Hunting. Students can complete this in teams but they will need access to an amortization calculator, an appreciation calculator, and a rent vs. buy calculator. The second activity, Rent or Buy, can be done at home or in class.
Finally, the Debate-Persuade-Inform activity is explores gentrification and housing shortages. This is certainly a hot topic here in California, particularly in the Bay Area. This presents some political, economic, and public policy issues students should know a little bit about. The optional curated tech is Diigo.com. This is a program that enables students to collect, save, and tag online resources, and share resources with teams or groups with whom they’re collaborating.
Our next lesson’s Ponder & Predict, has students contemplating their old age. Will they work until they’re 80? How will they retire? What age do they want to retire at, and how do they think they’re going to have enough money to live comfortably in their golden years?
The Blog Q has students weighing in on their dream home style. Would they want to live in a high rise apartment, in a single family home, modern or traditional? What’s their dream home and where is it dream-located?
So that wraps up this podcast. I’ll see you next time for Lesson 10 when we move on to Your Risky Retirement. Thanks for joining me!