Chapter 4: Fun with Real Estate Math
IN THIS LESSON
Buying a house is a big deal, and most people don’t have enough cash to pay for the whole thing upfront.
That’s where a mortgage comes in! A mortgage is a special kind of loan that helps people buy a house. Let’s break it down in a way that makes sense, so you can see how it works — and why it’s like borrowing a super important power-up in a game!
1. What is a Loan? 💸
First, let’s talk about loans. A loan is when someone (like a bank) gives you money to buy something, and you agree to pay it back later. But here’s the catch: you don’t just pay back the same amount you borrowed; you pay a little extra over time. This extra is called interest.
So, if the bank gives you $1,000, you might end up paying back $1,100 in total — the original $1,000 plus $100 in interest. It’s kind of like when you borrow a tool in a game, but every time you use it, it costs you a few coins.
2. How a Mortgage Works 🏠💰
A mortgage is just a loan that’s used specifically to buy a house. Most people can’t afford to pay for an entire house at once, so they ask the bank for a loan (a mortgage). Here’s how it works:
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The buyer first pays a small portion of the house price upfront. This is called a down payment. It’s kind of like putting down a deposit for something in a game to unlock it.
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The bank pays the rest of the price for the house. For example, if the house costs $300,000 and the buyer can only pay $30,000 upfront, the bank lends the remaining $270,000.
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Over time (usually over 15 to 30 years), the buyer pays back the bank through monthly payments. These payments include both the amount they borrowed and interest (that extra bit of money for borrowing). It’s like buying a high-priced item on installments in a game — you don’t pay all at once but slowly over time.
3. Interest: The Cost of Borrowing 💸➕
Now, here’s the tricky part: interest. This is the extra money you pay to the bank for letting you borrow the loan. The longer you take to pay off your mortgage, the more interest you’ll have to pay. It’s like when you keep using a rented item in a game — the longer you use it, the more it costs.
For example, let’s say you borrow $200,000 from the bank. The bank might charge you 3% interest, meaning each year you’ll pay an extra 3% on the loan until it’s paid off. That’s why people want to pay off their mortgage as quickly as possible — to avoid paying too much interest!
4. What Happens If You Don’t Pay? 🚨
If the buyer doesn’t make their monthly payments, the bank can take back the house. This is called foreclosure. It’s a bit like losing a power-up or tool in a game because you didn’t meet the rules. The bank needs the money back, and if you don’t pay, they get the house instead.
But don’t worry — as long as people make their payments on time, they keep their house and everything’s fine!
Why Do People Get Mortgages? 🤔
People get mortgages because they allow them to buy houses sooner rather than waiting until they have enough money saved up to pay the full price. Mortgages make home ownership possible for millions of families, giving them a place to live while they gradually pay it off over time. It’s like using credit to get something in a game and paying for it bit by bit — but this is real life!
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