Teaching Financial Literacy To Teens: Moving Out
Your older teen may be ready to move out and find an apartment or house to call home. Ideally, this is a mutually agreed-upon move that is the result of your child's independence and maturity and not in response to family troubles. Rather than discuss the reasons behind the move, however, we will focus solely on the process: how does your child rent or buy a place to live? While most teens are focused on the rental market (i.e., renting an apartment or house), a few may be ready to purchase a home. In this section, we'll take a look at considerations for both.
Renting property, rather than owning, is an option for many people who are not yet ready to settle down, who will be living in an area only temporarily (such as for college), who are not willing or able to meet the financial obligations of a mortgage, or who choose to enjoy the benefits and flexibility of renting. College and graduate students often rent in order to move out of campus housing. Renting may offer students more privacy, a more productive atmosphere for studying, and the ability to cook their own meals (rather than use the school's cafeteria). Renting may also enable students to bring cars to school (some colleges do not allow students to have cars on campus because parking is so limited), as well as sporting equipment such as bikes or kayaks.
Your child's rental budget will likely guide his or her search: you may find that rental rates are prohibitively high in your child's first choice area, so it's a good idea to have several areas in mind. Other factors to consider include:
Today's apartment complexes offer an array of amenities - from 24-fitness centers to 24-hour concierge services. In general, the more high-end the amenities, the higher the monthly rent is likely to be. Most rental communities, such as apartment complexes or townhome rental communities, have Web sites that describe the amenities, as these are often selling points for renters. These may be divided into "interior amenities" that refer to each of the individual rental units, and "community amenities" that describe the property-wide features.
Your child should consider what his or her daily commute to work and/or school will be. It might make financial sense to rent closer to work/school even if it demands a higher monthly rental rate because of the gas money and time that will be saved, particularly in urban areas with known rush hour traffic problems.
Certain rentals will allow you to have a pet. You may be required to pay a "pet deposit" that will be returned if there is no pet damage once you move out, or a non-refundable "pet fee". The fee is often used to de-flea, deodorize and shampoo the unit's flooring and/or upholstery. You may also have to pay "pet rent", a monthly or yearly fee intended to cover expenses related to normal wear and tear from the animal(s).
Some properties have breed specific restrictions, usually to prevent certain "bully" breeds such as pit bulls and bulldogs from entering the property. Landlords may also limit the number of animals allowed in any one unit, and enforce weight and height limitations.
If your child has decided for financial or social reasons to find a roommate, care should be taken to find one that has similar housing goals: are they interested in a quiet home life, loud music and parties, or something in between? Regardless of lifestyle, it is important that all roommates share common goals; otherwise, the living situation can quickly turn bad.
You can find roommates by word of mouth, campus newspapers, or by searching a variety of online roommate matching services. A quick Google search for "rental roommate" brings up a number of these Web sites. It may be easier to find a compatible roommate if each party asks questions: When should stereos be turned off? How will cooking and food shopping be shared? Who will write the checks for rent and utilities? Is it okay for girlfriends or boyfriends to spend the night, and, if so, how often? How will rent be divided? Who will get which bedroom?
Determining "exit procedures" is also helpful. How much notice will roommates give one another before moving out? For how long will they continue to pay rent? Will the roommate be responsible for finding a replacement?
Addressing these questions ahead of time can help create a better experience for everyone. For added peace of mind, roommates can enter into a "Roommate Agreement" that defines the terms of the cotenancy, and outlines details such as each person's share of the rent and utilities, who gets which bedroom, how will chores be divided, how food and shopping will be handled, rules regarding guests, and plans for dispute resolution.
Buying a Home
Buying a home is usually the single largest investment that a person will ever make. For most buyers, the process is lengthy and emotionally and financially demanding. Although there are many factors to consider and steps to take before buying a house, here we focus only on a key financial aspect: getting a mortgage.
Most homebuyers will need to secure a mortgage to finance their home. Many teens and young adults will be unable to qualify for financing on their own, often because of a lack of credit history (remember, even responsible young adults are at a disadvantage in terms of credit scores simply because of their inherently short credit history). As an adult, you can cosign on a mortgage, but that option needs to be carefully considered since the amount of the loan will be considered both your child's debt and yours.
Obtaining a Mortgage
A mortgage is a pledge of real property as security for the payment of money, and you and your child have a variety of options in terms of lenders and loan types. Obtaining a mortgage can be a daunting task, but understanding the options and process can help you find the best mortgage for your situation.
Choosing a Lender
A variety of banks, mortgage brokers and online vendors provide mortgages to homebuyers. Banks are the traditional source of mortgage funding, offering in-person meetings, recognized name brands and competitive fees. Banks, however, may not have a broad variety of loan programs and as a result may not offer the lowest interest rates or lowest fees. Mortgage brokers act as the middle-person between lenders and borrowers, and typically offer a variety of loans, including loans for people who have bad credit. Brokers may offer in-person service and be able to provide loans with lower interest rates; however, the fees may be more expensive than other funding sources. Finally, online mortgage providers offer a large variety of loan types, convenient 24-hour shopping and instant comparison between multiple loans. In-person services are not available, however, which can leave you with unanswered questions.
Personal and financial factors may affect the decision to go with a bank, mortgage broker or online mortgage provider. If you want to discuss the mortgage face-to-face with the lender, for example, you should shop at banks or mortgage brokers. This may be the best idea for teens, especially if you are co-signing, because they can be more involved in the process and ask questions directly. If you are Web-savvy, however, and familiar enough with the process to teach your teen yourself, then you may benefit from using online mortgage providers.
Pre-Qualification and Pre-Approval
A lender can help determine the amount of money that can be borrowed through a process called pre-qualification. Typically, you meet with a lender and provide information regarding your assets, liabilities and income. The lender will provide an estimate of the size of the potential loan, though the lender does not formally agree to approve the mortgage at this point. Pre-qualification helps your teen determine his or her appropriate price range.
Your teen needs to apply for the mortgage by completing the necessary paperwork. After a lender verifies all the financial information provided (checking credit scores, verifying employment information, calculating debt-to-income ratios, etc.,) the lender can pre-approve him or her for a certain amount. If you are co-signing, you will need to include your information, as well. This confirms your teen's eligibility to qualify for a mortgage, strengthening his or her position when finding a desired property and making an offer.
The Down Payment
Depending on the type of property involved and the particular mortgage, down payments can range from about 3.5 to 20% or higher. Lenders may require up to a 50% down payment, for example, on certain condominiums that are not on the FHA-approved condominium list. The closing, or settlement, is the event that transfers ownership of property between the seller and the buyer (your teen). The property will be recorded in your child's name, or both of your names if you are co-signing, and the city or county will be notified of the transaction and record the new owner(s) of the property.
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