Cheat Sheet Q&A:
Today’s topic: Do many mortgages include prepayment penalties?:
Bottom Line: Today’s question actually came from Jim Edwards. He is considering selling an investment property and his current primary home but wants to buy and move into a new home first. He would take out a mortgage for a short period of time until he could sell the two properties. He’d then use the proceeds from the sale of those properties to pay of the mortgage. He wants to ensure he avoids a mortgage with a prepayment penalty as a result. So… How prevalent are mortgages with prepayment penalties?
Mortgages with prepayment penalties have almost always been a raw deal for the person who takes out a mortgage. With the average homeowner moving every seven years historically, virtually any mortgage in years gone by would be penalized by a mortgage that included a prepayment penalty. There never has been a period of time in which they were common but near the end of the housing boom up to 20% of mortgages did include some type of prepayment catch/penalty. Mortgage companies recognized that many of the mortgages being taken out were by home flippers who were leveraging up and would be willing to pay the prepayment penalty as a cost of the high risk flipping process. Much has changed since then. For that matter most mortgages with prepayment penalties aren’t even legal anymore.
As of January 10th of this year:
- There can’t be any prepayment penalties on a mortgage after three years
- Any loan with a prepayment penalty has to be a fixed rate loan
- Any loan with a prepayment penalty has to be 30 or fewer years in length
- Additional points (or other like costs) may not be charged for loans with a prepayment penalty
Because these provisions are now in place, very few mortgage lenders have any loans with prepayments. So most likely you’ll not even come across this type of product but if you do be should to avoid it and move onto another mortgage option.
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The three emotions most closely linked to debt & bad money decisions:
Bottom Line: Credit.com studied emotions and financial decisions to identify the three emotions that lead us to make bad financial decisions and keep us in debt. I think this is an extremely valuable piece of research as my first rule money is… Never allow your money and your emotions to cross paths. You’ll make mistakes if you do. With that in mind…
Worst emotions: Sadness & Euphoria followed by Apprehension. It makes perfect sense if you think about it.
If you’re down and out you may try to “buy” happiness. Filling your life with things. We all know people who’ve done this right? The other end of the spectrum is true as well right? If you’re euphoric, it’s time to reward yourself. So you book that vacation or buy that new car because you deserve it.
So the first two ways to ensure that you don’t make bad money decisions is to not commit to spending any money or making any financial decisions of consequence when you’re too high or low. Apprehension comes into play because it’s what keeps us in the debt rut once we get there. If you have a history of debt and questionable decision making how do you break the pattern? Like any chance of significance in your life it takes dedication and commitment. If you’re apprehensive you’ll never stay committed to breaking the cycle that led to you ending up in debt.
Evidence that the GM recall is taking its toll at least for now:
Bottom Line: So the recall era for vehicles has reached a new level with the GM cover up scandal. Every auto manufacture seems to be tripping over themselves to recall vehicles for even the most minor potential defect in an attempt to c-y-a and insure that they don’t become the next to commit a GM type of mistake. But what about the 2014 poster child of breaking bad – auto addition? We’re starting to see sales data that shows GM’s ignition switch cover up is hurting business.
The vehicle most directly involved is the car at the heart of the ignition switch cover up. The Chevy Cobalt. Here are a couple of relevant numbers.
- Trade-ins of Chevy Cobalts are up 21% over the same time last year
So clearly many owners want to get out of the vehicle & its potential issues.
- Only 49% of those who have traded in a Cobalt in 2014 have purchased another GM product
So this is where the real damage shows up. GM is losing more than half of their existing customers that are trading in these affected recalled vehicles. This means that these customers are gone for many years at a minimum and may never return to a GM product down the line. It remains to be seen if this will be a short-term trend within this news cycle (odd are it will) but in the meantime they’ve lost more than half of affected customers for a minimum of 5-7 years (the average length of time one owns a car these days).
How much drugs, prostitution & gambling add up to in the US:
Bottom Line: A couple of weeks ago Italy added the underground economy to their GDP in an effort to avoid defaulting on the conveyance of their EU bailout (based on a debt to GDP ratio). It got some economic researchers to thinking. What if other countries added the underground economy?
So how big do you think the underground economy is in the US? Some estimates have been as high as 20% over the years. Well it turns out that we’re fairly honest and perhaps a bit more decent than many might suspect. The Bureau of Economic Analysis (responsible for US GDP) says they don’t intend on including the underground but British based Eurostat, using the Bureau’s methodology the figure is… About 3%. So it’s a significant number. After that means that about 3 of every 100 dollars exchanged is being done illegally. The flip side, of course, is that 97% of what we do is above board and honest.
Built better, serviced better, & economics - New record age of used cars:
Bottom Line: Much has changed in the past ten years. The way we look at our car for example is one of them. Ten years ago were you more likely to buy a more expensive car then you would today on a relative basis. Were you quicker to trade in your car for a new one? The reason that I’m traveling down this path is that we just set a new record for the average age of the cars we’re driving.
- The average age of a car on the road in the US is currently 11.4 years old
That broke the record of 11.3 years of age set just last year. By comparison ten years ago the average age of a car was 9.7 years old. All told more than 53 million cars are more than 15 years old (or more than one in 5 cars on the road). Hence my headline… Cars are being built better, we’re taking better care of them and we aren’t feeling the need to buy the newest, shiniest vehicle anymore.