Any time there is a way to zoom in on something that is tangible and affects the family directly, it is a great opportunity to teach kids about the macroeconomic picture. Teach kids about mortgage refinancing and they’ll learn about why we’re in a recession and what all the subprime talk meant anyway.

This is a lesson for parents who have looked up the value of their house recently and know it’s a candidate for refinancing. Make sure to do that before proceeding. Also make sure that you are credit worthy for a refinance.

If you’re a candidate, it is truly a good time to refinance a mortgage. As the economy strengthens, interest rates will certainly go back up. And that is the first thing to tell teens. Tell them there is an inverse relationship between lending rates and the health of the economy.

And here’s the theory: When the economy is unhealthy, people and businesses alike need to be encouraged to spend money, take out loans, feed the economy with payments, which in turn makes money flow both ways, to corporations, who in turn employee people, and therefore pay them.

When the economy is healthy, there is no need for such incentive. People can afford things and shouldn’t take on too much debt, so debt is expensive. (That’s the honorable banker theory, by the way. I’ll leave other theories to your imagination.)

So we start with a premise that the economy is still struggling, though recovering, therefore it is an optimal time to refinance. Wait too much longer and it will be more expensive.

That brings us to the steps to learn about mortgage refinance. You may be surprised what your teen finds out.

Define mortgage for teens. Explain that the bank really owns your house. You take out a loan to live in the house until you either pay it off or sell it. Traditionally, people take out 30-year loans, and each month a portion of their mortgage payment goes to pay off the loan (called the principal amount, usually a small portion), and a portion goes to pay interest, which is the money the mortgage lender earns for your privilege of borrowing money and living in the house. So interest is mortgage lender’s monthly fee.
Show them your mortgage statement, so they see exactly how much is owed, and how much is paid toward principal and interest each month. They should be appalled right about now.
Tell them about your interest rate and how that number is the one that determines the monthly fee you pay the lender for borrowing the money. Show them how that works. See our post on interest rates and how to calculate them.

Tell them that refinancing means trading in the loan you have for a new loan. Essentially, this means trading in your current interest rate for a lower one. That is the only time it is worth refinancing, because a lower interest rates lowers your overall monthly payment and debt.

Send them to your mortgage lender’s website to research refinance options. Tell them to find out what the refinance costs are. They can call the mortgage lender to find this out. The best bet is to actually take them to your financial institution and have them explain in person. Make sure kids get an explanation that there are closing costs and other fees you need to pay just to get the refinanced option.

Make sure they also get an explanation about credit ratings and how much income you need to qualify for refinancing.

Have them calculate how long it would take for the refinance to start paying for itself. This means you need to pay off the closing costs and other overhead. Until that is paid off, you need to add that to monthly payments. How many months does it take before the lower refinanced monthly payment starts to save you money (i.e., how many months before closing costs are paid off)? If it will take, say, a year, but you are planning to put your house on the market in 6 months, refinancing might not be a good idea. Explain to them that refinancing is a good idea when you intend to live in the house for a long time. Lenders will not refinance any mortgage for a house that is on the market.

You’ll be surprised how much teens will learn about what happened to our economy. They’ll also understand the enormity of owning a house and how important is to start saving for it.

Let me know if your kids find you a good deal!

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