More ways to shoot yourself in the foot
Mar. 17th, 2009 02:24 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
norsegirlIt's simply amazing to me how many ways there are in this country to shoot yourself in the financial foot. Every day I encounter another. Today's financial idiocy came in the form of a question from my loan officer when I inquired about how to make an additional principal payment on my mortgage.
In Canada, one is typically penalized for making early principal payments as they decrease the amount the bank stands to make on you over the life of the loan. Obviously, they don't really want you making these and would rather keep you in slavery for the original term of your loan. The penalty usually comes in the form of a fee when you make an additional payment or taking a slightly higher interest rate in order to have more flexible terms.
In the US, the standard rule however is make an additional payment of any amount at any time, no strings attached. Yay for that! I'm fairly good with money, but I realize I'm not good enough to figure out how much I'll be able to carry as a maximum payment from month to month. Trying to do so will inevitably result in a mistake one way or the other. I'm much better at suddenly noticing we have plenty of extra cash and then being able to put it into the appropriate place. Also, part of our finances are variable. I never know what Jason's stock options or bonuses will wind up being, so it's best not to count on them, and just treat them like a happy windfall when they come in. There's also the detail of still having some cash tied up in Canada while I wait for the dollar to improve. When I am able to move that down here, that will probably go into the mortgage too, but I don't know how long I'll have to wait to make it worth moving that cash, if ever. We might just leave it up there and continue to use it when we go home, though it is doubtful we'll ever get through it all at just 2 weeks of visits per year.
Anyway, this week we decided to put a nice sum of money into the mortgage as Jason got some stock options cashed out. I wrote my mortgage officer a quick note asking how we should go about doing this. I only asked because I had a friend whose mortgage company must have been run by Larry, Curly and Moe. They made additional payments and instead of applying them to the principal, the bank had this person recorded as being something stupid like 24 months ahead on their payments (while still calculating interest on the non-reduced principal).
When she responded, my loan officer asked if I wanted to pay a fee to "recast" my loan right now. If I did not want to, the loan would be re-evaluated on its normal 2 times per year schedule (July and Dec). I had to google "recast" as I had no idea what this was.
As it turns out, recasting is a different way of saying recalculate. Basically they apply your principal payment and recalculate your amortization over the life of your loan so you still pay your loan off at the end of the original term but you get to make smaller monthly payments. They charge a fairly hefty fee for this (in my eyes) at a few hundred dollars ($500 for my mortgage company), in order to keep you enslaved for the original term, but allowing you to pay a tiny bit less per month. Seems to me that you're doing them a favour if you recast as they will have the opportunity to make more money off you in the long term. Of course, banks do love fees and will find any excuse to charge them.
The idea is that recasting your loan will make it easier for you to continue making payments if you are experiencing some sort of financial distress (and who isn't these days?), but can people who are experiencing financial distress make the kind of additional lump-sum principal payments required to have a recast? I'm thinking that's unlikely. So their target market is the grasshoppers of our world. The people who think of today and not their future. The people who go "oooh goody, another $100 in my pocket each month" and fail to see another 2 or 3 years of owing the bank and the thousands in additional interest they will pay over the years. And this is what amazes me. That people will pay a fee for the privilege of the short-term cookie of a few hundred dollars that they'll probably throw away on something they won't even have any more at the end of the mortgage instead of taking months or years out of their sentence.
For that matter, I'm rather stunned at the terms of mortgages in general. Here's a fun factoid:
On mortgages in the UK: "The average first-time buyer is now aged 29-years-old and 70 per cent of buyers opt for a 25 year term on their mortgage."
I couldn't find any similar data for North America, but I get the impression that the average Canadian mortgage is about 25 years, while the average US one is about 30. No idea on the average age of first-time home-buyers, but few of my 30-something friends are in that boat yet, so if my social circle is in any way representative, 30+ would be a reasonable estimate.
Assuming you stay in your first home and don't purchase a new one (with a new mortgage that might have amortized you out to a later end-date than that first mortgage), that means the average person is making mortgage payments right up to 54-59 years old. In our case, being 30 at purchase date and on a 30-year, we'd make our final payment at 60!?!?! I get that a house is your biggest investment, but do you really want to still be paying for it when your kids are done college and you're trying to retire?!?! For that matter, why is it that people think that having kids is this huge commitment, being 18+ years of living with them, but that a 30 year mortgage is no big deal, and tacking another 5 years on if things are tight is okay?
We're paying bi-weekly, which results in an extra month's worth of payment per year and reduces the interest by reducing the principal every other week instead of just once a month, and nets us 8 years less of payments. It works with Jason's pay dates anyway, so why not? With this little amount we're putting in this week we'll shave another 2 years off, so we're already down to being finished by 50, which is still a long freaking time. It's making me seriously consider getting my ass off the couch and making a real dent in this debt. I probably will after the baby is born. The guilt/pressure/feeling of slavery that comes with debt is really bugging me. Especially when I consider that it would only take a handful of years of work for me to get us out of it. Jason is pushing to put even more down on the mortgage now, but I've talked him into waiting and seeing what the next bonus yields, if anything.
Other than my husband's brother, who has been attacking his mortgage like a man possessed, it seems like only Jason and I are concerned about this whole debt thing. Are we nuts?
In Canada, one is typically penalized for making early principal payments as they decrease the amount the bank stands to make on you over the life of the loan. Obviously, they don't really want you making these and would rather keep you in slavery for the original term of your loan. The penalty usually comes in the form of a fee when you make an additional payment or taking a slightly higher interest rate in order to have more flexible terms.
In the US, the standard rule however is make an additional payment of any amount at any time, no strings attached. Yay for that! I'm fairly good with money, but I realize I'm not good enough to figure out how much I'll be able to carry as a maximum payment from month to month. Trying to do so will inevitably result in a mistake one way or the other. I'm much better at suddenly noticing we have plenty of extra cash and then being able to put it into the appropriate place. Also, part of our finances are variable. I never know what Jason's stock options or bonuses will wind up being, so it's best not to count on them, and just treat them like a happy windfall when they come in. There's also the detail of still having some cash tied up in Canada while I wait for the dollar to improve. When I am able to move that down here, that will probably go into the mortgage too, but I don't know how long I'll have to wait to make it worth moving that cash, if ever. We might just leave it up there and continue to use it when we go home, though it is doubtful we'll ever get through it all at just 2 weeks of visits per year.
Anyway, this week we decided to put a nice sum of money into the mortgage as Jason got some stock options cashed out. I wrote my mortgage officer a quick note asking how we should go about doing this. I only asked because I had a friend whose mortgage company must have been run by Larry, Curly and Moe. They made additional payments and instead of applying them to the principal, the bank had this person recorded as being something stupid like 24 months ahead on their payments (while still calculating interest on the non-reduced principal).
When she responded, my loan officer asked if I wanted to pay a fee to "recast" my loan right now. If I did not want to, the loan would be re-evaluated on its normal 2 times per year schedule (July and Dec). I had to google "recast" as I had no idea what this was.
As it turns out, recasting is a different way of saying recalculate. Basically they apply your principal payment and recalculate your amortization over the life of your loan so you still pay your loan off at the end of the original term but you get to make smaller monthly payments. They charge a fairly hefty fee for this (in my eyes) at a few hundred dollars ($500 for my mortgage company), in order to keep you enslaved for the original term, but allowing you to pay a tiny bit less per month. Seems to me that you're doing them a favour if you recast as they will have the opportunity to make more money off you in the long term. Of course, banks do love fees and will find any excuse to charge them.
The idea is that recasting your loan will make it easier for you to continue making payments if you are experiencing some sort of financial distress (and who isn't these days?), but can people who are experiencing financial distress make the kind of additional lump-sum principal payments required to have a recast? I'm thinking that's unlikely. So their target market is the grasshoppers of our world. The people who think of today and not their future. The people who go "oooh goody, another $100 in my pocket each month" and fail to see another 2 or 3 years of owing the bank and the thousands in additional interest they will pay over the years. And this is what amazes me. That people will pay a fee for the privilege of the short-term cookie of a few hundred dollars that they'll probably throw away on something they won't even have any more at the end of the mortgage instead of taking months or years out of their sentence.
For that matter, I'm rather stunned at the terms of mortgages in general. Here's a fun factoid:
On mortgages in the UK: "The average first-time buyer is now aged 29-years-old and 70 per cent of buyers opt for a 25 year term on their mortgage."
I couldn't find any similar data for North America, but I get the impression that the average Canadian mortgage is about 25 years, while the average US one is about 30. No idea on the average age of first-time home-buyers, but few of my 30-something friends are in that boat yet, so if my social circle is in any way representative, 30+ would be a reasonable estimate.
Assuming you stay in your first home and don't purchase a new one (with a new mortgage that might have amortized you out to a later end-date than that first mortgage), that means the average person is making mortgage payments right up to 54-59 years old. In our case, being 30 at purchase date and on a 30-year, we'd make our final payment at 60!?!?! I get that a house is your biggest investment, but do you really want to still be paying for it when your kids are done college and you're trying to retire?!?! For that matter, why is it that people think that having kids is this huge commitment, being 18+ years of living with them, but that a 30 year mortgage is no big deal, and tacking another 5 years on if things are tight is okay?
We're paying bi-weekly, which results in an extra month's worth of payment per year and reduces the interest by reducing the principal every other week instead of just once a month, and nets us 8 years less of payments. It works with Jason's pay dates anyway, so why not? With this little amount we're putting in this week we'll shave another 2 years off, so we're already down to being finished by 50, which is still a long freaking time. It's making me seriously consider getting my ass off the couch and making a real dent in this debt. I probably will after the baby is born. The guilt/pressure/feeling of slavery that comes with debt is really bugging me. Especially when I consider that it would only take a handful of years of work for me to get us out of it. Jason is pushing to put even more down on the mortgage now, but I've talked him into waiting and seeing what the next bonus yields, if anything.
Other than my husband's brother, who has been attacking his mortgage like a man possessed, it seems like only Jason and I are concerned about this whole debt thing. Are we nuts?
