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1 “Mortgage, Sweet Mortgage” 2018 Virginia Council on Economic Education Economic Educator Lesson Plan Winner Christine Pedersen Lesson Targeted to 9-12 Grade I. Abstract: When students think about buying a house, they generally think of the sales price, and not the cost of financing. The idea of how much the actual cost of their house is affected by the financing option they choose is a real eye-opener for them. To explore this important concept, as an exit ticket the day before the lesson, I ask students about whether they plan to own a home (as opposed to rent), and how much they think houses cost. Their homework is to select a “starter home”—a local house currently for sale under $250,000-- which they find by going shopping on the Internet (Zillow, Trulia, Realtor.com). The next day, the students informally share “their” houses and we talk about how the house hunting went. I ask for 4 volunteers to perform a skit I wrote called “Mortgage, Sweet Mortgage.” The skit introduces the idea of shopping for a mortgage just like you would shop for a house. My lesson covers how amortization works--a concept a lot of adults don’t really understand—and how that plays a role in how a 30 year mortgage pays off compared to a 15 year mortgage. We also look at how a big or a little down payment affects what you will pay over all We discuss alternative programs such as HUD homes, VHDA offerings, and look at why a no-down-payment VA loan or low-down-payment FHA loan might be worth doing, even though it gives you a higher monthly payment. Going virtual house hunting is a fun activity, and it makes the financing part more relatable. To me, there is extremely high value in having my students getting this kind of information in our classroom, instead of encountering it when they are actually looking for a place to live in the future—when hundreds of thousands of dollars are in play, and there are parties who stand to profit by “educating” about home loans. To cover the big picture, students explore concepts such as equity, being “house poor,” and getting on the “property ladder.” And we also look at the local tax rate and briefly discuss insurance, so students understand the PITI aspect of home ownership. For the final part of the lesson, students examine how their credit score can impact the interest rate they can get, and explore how much that affects their loan costs. Students use financial calculators to show how much their house would cost at a 30 year loan with poor credit and a 5% down payment (requiring PMI) and a 15 year loan with excellent credit and a 20% down payment; they prove to themselves and each other that understanding how home loans work, and putting in a couple hours of shopping for a mortgage, might save them a hundred thousand dollars or more over the life of a loan. II. Economics Content and Key Concepts:

2 Housing market – buyers and sellers come together to sell or purchase real estate. Brokers and/or agents are often involved to aid the transaction. Opportunity cost—Opportunity cost represents the benefits an individual, investor or business misses out on when choosing one alternative over another. https://www.investopedia.com/terms/o/opportunitycost.asp#ixzz5NXkRKBMB Amortization of loans – With auto- and home-loan payments, most of the monthly payment goes toward interest early in the loan. With each subsequent payment, a greater percentage of the payment goes toward the loan's principal. https://www.investopedia.com/terms/a/amortization.asp#ixzz5NXluHQA8 IV. Economic Standards and Student Learning Outcomes: EPF.11 The student will demonstrate knowledge of planning for living and leisure expenses by d. describing the process of purchasing a home; Students will demonstrate knowledge of amortization Students will understand the effect of larger and smaller down payments on monthly payments and the overall cost of a loan V. Instructional Process: BUILD BACKGROUND: Previous to the lesson, have a discussion about renting versus buying a home. Point out that this is an individual decision, the kind that puts the “personal” in personal finance. There are costs and benefits (financial and personal) for both options. [While this lesson centers on home buying, there are complementary lessons and resources that you might want to use to help students explore the process of renting (EPF 11.c) and to help students compare renting vs. buying (EPF 11.b)--see Resources for links.] Have students answer three questions: a. How many of you plan to be homeowners some day? b. Do you know how much new homes cost? c. How do you plan to pay for your new home? They are then assigned to select a “starter home” as a personal residence—a local home under $250,000 that is currently for sale on the internet, using Zillow.com, Trulia.com or Realtor.com. Give the students about 10 minutes to start on this in class if you can, because they will enjoy it and get each other excited about doing it, so you will have better participation tomorrow. HOOK/ATTENTION GETTER: Before the skit, tell the students that what they will learn through this lesson can save them over $100,000—real world money. Then, have 4 students perform the skit “Mortgage, Sweet Mortgage.” You will need four copies of the script for the

3 actors, and I like each person to wear a tag identifying them as “Lender” or “Real Estate Agent” etc. DIRECT INSTRUCTION: Almost no one has enough money saved up to buy a house outright. Most people finance their homes, by borrowing money from a bank and paying interest in addition to paying back the amount borrowed, which is called principal. Real estate is a special kind of property, and purchasing it requires a special kind of loan called a mortgage. Mortgages are almost always amortized. Amortization means the loan is front loaded to pay off mostly interest and only a little bit of principal at the beginning. I have the students draw a rectangle in their interactive notebooks (sample is included in the Resources section, labelled “Amortization Chart”), and then they split the rectangle in half by drawing a vertical line, and then split each half into thirds by drawing two additional vertical lines on each side. They will label the drawn lines on the x axis 5 years, 10 years, 15 years up to the 30th year (outside line of rectangle.) I then have the students draw a diagonal line from the bottom left hand corner of the rectangle to the top right hand. The space to the left is labeled “interest” and the space to the right is labeled “principal.” We could split this rectangle into 360 slices, each representing one month of payments. If we did that, you would see that the first month is almost all interest, and almost no principal. And by the end of 30 years, the ratio is flipped and it is almost all principal and almost no interest. So, what happens if you move after only being in your house for 5 years? [Students should realize they would have repaid very little of the loan]. Have the students draw a second rectangle. This one, they will split into thirds by drawing 2 vertical lines. They will label the lines year 5 and 10, with the outside line of the triangle labelled 15. They’ll draw another diagonal line to represent the split between interest and principal. It is easy for the students to see that if they moved in year 5 of a 15 year loan, they would have significantly more equity in their house. Let’s look at how this breaks down using something called a mortgage calculator. https://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx Click on the link “Show Amortization/Payment Schedule” to see the breakdown of principal to interest. Mortgage loan officers call this “P & I” When you purchase a house using a mortgage, the bank takes a risk that you will not be able to pay back the loan—and these are big loans, for hundreds of thousands of dollars. Mortgages generally have a low interest rate overall, compared to something like credit cards. Why do you think this is the case? [Students may know about secure loans and foreclosure. The bank can take back the house in a legal process known as foreclosure, and they can resell it to make back their money.] Banks don’t want to be in the real estate business, though, so they like you to put in some of your own money, too, so you won’t just give up and stop paying the mortgage if something unexpected happens. Usually, banks want you to put down 20%. So on a $100,000

4 house that would be you paying $20,000 as a down payment with the bank loaning you $80,000. For most people who don’t put at least 20% down, the bank requires the borrower to pay something called PMI, Private Mortgage Insurance, until you do have 20% equity in the house (show what this would look like on the 15 and 30 year charts the students drew, if these were zero down payment loans). And the bank won’t tell you when you’ve hit that point—it’s your job to keep on top of that. Using the mortgage calculator at https://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx, look at the difference in your payment if you put down 0%, 20% and 30%. What do you notice? [Students will quickly see the bigger the down payment they make, the smaller their monthly payment will be]. So a big or a little down payment affects what you will pay over all, plus you will generally have to pay PMI if you have a regular loan and less than 20% down. P&I aren’t everything, though. Your whole house payment is actually PITI. Any guesses about what the “TI” means? [T for Taxes, I for Insurance]. If you don’t pay your taxes, you can actually get a lien put on your house or even have your house taken and sold to pay the taxes. If you don’t have insurance and your house burns down, you would still owe the money on a house that wasn’t there—so you would probably quit paying. That’s why the mortgage company does not trust you to pay your own taxes or insurance. They make you pay these as part of the loan itself—when you close on your loan you have to bring enough money to the closing table to have a cushion for them to pay your taxes and insurance. They call this “escrow”—like a holding account for your money. And then the mortgage company pays your taxes and insurance from this escrow account, which you are paying into when you send in that mortgage check. Besides how long you finance your house for, and how much of a down payment you have, the interest rate is the biggest factor in how expensive it is to borrow money. And your credit score is the part you can control about interest rates. If you have bad credit (a low score), you probably can’t get a loan at all. But if you have weak credit, you will pay more interest than someone with excellent credit. Try it with the loan calculator. Use a score of 640 and then run the same exact figures but with a credit score of 770. [Note: If you haven’t covered credit scores yet, you can just point out how the APRs advertised are usually a range, and students should be told the highest (most expensive) rates are for people with shaky credit and the lowest (cheapest) rates are for people with excellent credit. INDIVIDUAL PRACTICE: Use a mortgage calculator to show how much your chosen house would cost at a 30 year loan with poor credit and a 5% down payment (requiring PMI) versus a 15 year loan with excellent credit and a 20% down payment. Share your results with your elbow partner, then square up with your group. The person who had the biggest difference should write how much money you could potentially save (or waste) on the board.

5 ACTIVITY: Students look up the address of their target home and figure out the property taxes. They will divide this by 12 to come up with the monthly charge. Students should see that the more expensive the house, the more expensive the taxes. GROUP WORK/GUIDED PRACTICE: (Expert/Jigsaw): Students will split into 4 groups: HUD, VHDA, VA, FHA. In their expert groups, students will explore a particular loan program.(15 minutes) Then, the students will split into jigsaw groups and share with each other what the learned about the loan programs in their expert groups.(15 minutes) ENRICHMENT: The student will show the cheapest and most expensive mortgage they discovered, showing 1) the PITI at years 5, 10, 15 for a 15 year mortgage and 10, 20 and 30 for a 30 year mortgage; 2) the total amount paid for each mortgage for both principal and interest; and 3) the difference between the total (P&I) over the entire life of each loan. VOCABULARY: Housing market, opportunity cost, equity, mortgage, amortization, down payment, private mortgage insurance, tax lien, credit score, house poor, property ladder Students can practice the vocabulary or play games to reinforce the terms at https://quizlet.com/_2pgpxy. VI. Evaluation of Student Learning: Students show their knowledge in the comments they make in their jigsaw/expert groups, and also in their discussion of how much their selected “starter house” costs them. The answers to student work also reveal that students understand the concepts. Appendix: A. Resources: Link to “How Amortization Works” article: https://www.thebalance.com/how-amortization-works-315522 Link to Mortgage Calculator: https://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx Financial Fitness for Life: Theme 4, Lesson 16 “Shopping for a Mortgage” [This is a great lesson for these concepts! The 7 percent interest rate in the example is currently very high.] Rent or Buy? https://bettermoneyhabits.bankofamerica.com/en/home-ownership/should-i-rent-or-buy

6 https://www.richmondfed.org/publications/education/5e_navigator/renting_v_buying_a_home https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0 B. Handouts, Worksheets, and Links: Padlet.com –sample of student work https://padlet.com/clpedersen/Home4 Script for “Mortgage, Sweet Mortgage” Skit: https://drive.google.com/file/d/12ycSmX5fTxhy1IkWjuzAGO-9B23osH8T/view?usp=sharing PowerPoint for Lesson: https://drive.google.com/file/d/1LGi7XEstBXsLKJIJEbP6-dzXU43moZGn/view?usp=sharing Amortization Chart example: https://drive.google.com/file/d/1GLo5ItNPR4X7AhO3J_iV3ryIWiNk1HM4/view?usp=sharing Show What You Know Enrichment Sheet https://drive.google.com/file/d/15PQSCRvUrp8TiNdS43K1UMcSjAxZPoRW/view?usp=sharing My Home Worksheet https://drive.google.com/file/d/1IG8eB_JzkuRt6KFDsuFwHYNkjfLWMJ1O/view?usp=sharing