Financial literacy month has come and gone, and now we pause to reflect on how our generally dismal financial knowledge affects the housing market.
Possessing financial literacy basically ensures you’re prepared to participate in society in a financially responsible way. This covers everything from understanding how to write a check to saving for retirement. When it comes to homebuying, being financially conscious also makes families aware of the need to save up for a down payment and of the different mortgage options available to them.
With ever-rising levels of student debt (11% of which is currently delinquent) and the shadow of the recent foreclosure crisis still lingering over the housing market, it’s fair to say most Californians have a lot to learn about personal finance.
How does our society ensure everyone has enough financial savvy to get by in life and avoid insolvency?
Option one is to teach it in school. California does not require financial education in high school, though it may be taught as a component of a standard economics course. In fact, California is one of only six states in the nation with no personal finance education requirements, according to the Council of Economic Education. Further, it’s not just a student problem — the same survey shows only one in five teachers report feeling able to teach on personal finance topics.
In a recent nationwide survey, just 27% of young adults were able to correctly answer three basic questions on savings accounts, interest rates and stocks. Further, the survey found that the ability to answer the questions correctly had a lot to do with the young adult’s socioeconomic origins. Thus, it appears financial knowledge has less to do with school standards and more to do with upbringing. You’re either born into a financially literate family or you’re not.
So if we’re not going to learn it in school (and apparently it wouldn’t really matter if we did), is there any hope for our financially illiterate society?
As real estate professionals, you’re in a unique position to help families become homeowners in a responsible and sustainable way. Do this by taking the following steps with homebuyer clients:
- Discuss the need for a down payment and the recurring costs of mortgage insurance when the down payment is less than 20% of the purchase price.
- Go over the mortgage financing options available to the homebuyer, which affect their homebuying budget and monthly mortgage payment.
- Shed light on the effect of other debts on their debt-to-income ratio (DTI), which influences their mortgage amount. It may make more sense for the homebuyer to pay down some of their other high interest debt before applying for a mortgage.
- Discuss the cost of utilities and home maintenance that are not included in the mortgage payment. Some homebuyers neglect these costs when planning their home purchase, to their great detriment down the road when they can’t keep up with unexpected payments. This is particularly true of first-time buyers who aren’t accustomed to covering maintenance costs themselves.
The government shares your financially literacy goals. Thus, become acquainted with the many forms and publications available to help answer common financial questions of current and future homeowners. Use these resources in your educational efforts, forming the basis of your financial lesson plans.
The Consumer Financial Protection Bureau (CFPB) has a variety of clear and simple publications, covering reverse mortgages, refinancing procedures and the homebuying process. first tuesday also has a number of forms free for you to download and complete with your clients, including a helpful mortgage shopping worksheet which assists homebuyers to easily compare mortgage terms. [See first tuesday Form 312]
Want to test your financial literacy? Take this quiz by the Investor Education Foundation and find out how you measure up against the rest of California.