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Blue Chip Kids: What Every Child (and Parent) Should Know About Money, Investing, and the Stock Market by David W. Bianchi

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CHAPTER 9 BORROWING MONEY (DON'T BORROW TOO MUCH—EVER!)

There are many reasons why people borrow money, but you need to remember that it is often much easier to borrow money than to pay it back. Be very careful about taking on debt, or the burden of paying it off will get worse and worse.

Mortgages

Borrowing money to buy a house is probably the most common reason that people take on debt. There are two ways to buy a house:

  1. You can pay cash for the house.
  2. You can pay some cash and borrow the balance of the money from a bank.

When you borrow money to buy a house, the bank will get a mortgage on the property you are buying. So what is a mortgage?

A mortgage is a fancy term that refers to a piece of paper that the bank records in the county's property appraiser's office that lets everyone know that the house you just bought has been purchased with borrowed money. If someone wants to buy the house from you someday, the mortgage will have to be paid off before you (as the seller of the house) will get any of the sale proceeds.

Let's look at an example. Let's say you want to buy a house for $500,000. You only have $200,000 in cash, so you go to a bank and borrow $300,000 so you can make the purchase. Before the bank lends you the $300,000, however, you will have to sign a bunch of papers agreeing to pay the bank back—with interest—and allowing it to place a mortgage on your property.

As soon as you sign the papers and complete the purchase of the house, the bank will have ...

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