Khan Academy course review: Finance and capital markets / Housing
I finished the Housing module of Khan Academy’s course Finance and capital markets. First it explains the process of evaluating if one should buy or rent depending on one’s personal circumstances. It’s an important evaluation that everyone should do, preferably away from their Realtor.
The course then goes over all the steps of evaluating, buying, and paying off a place. Seeing the calculations and detailed explanations for the different examples is helpful to understand how slightly different inputs can create vastly different outcomes. For example if the price of the house goes up, the buyer’s equity in the house goes up, and she can borrow cash with that newly created equity as a collateral. This is called a home equity loan, and that thing looks terrifying to me. One line from that part I really liked: when people buy a place with a mortgage they go from renting a place to renting money for a place. The interest on the loan is the rent.
The course also explains the etymology of the word mortgage, it is the bank pledging to give the title after the debt is paid off. Mortgage is an old French word, it’s a portmanteau composed of two words: mort –dead– and gage –pledge–. It’s called a dead-pledge because the deal dies when it is fully paid or when payment fails.
The course then introduces the different types of mortgages: fixed, adjustable, and balloon. Fixed are just a fixed rate for a set number of periods. Adjustable mortgages or ARM are based on an index, like one year treasury bonds, these are riskier mortgages than fixed rate. ARM are often mixed with fixed rate mortgages to make the risk more palatable to the buyer. Then there are balloon mortgages. If you like to take on as much risk as possible, and want a mortgage that can blow up in your face, you’ll love balloon mortgages.
The module finishes with a high-level overview of the house buying process, and explains what title, deed, and escrow are. I’m not planning to buy a place anytime soon, and this part gave me another reason to wait: buying a place is long, bureaucratic, stressful, and can be risky.