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Lincoln Institute


Making Cents

Doug Keegan explains the 'cash for clunkers' program


by Doug Keegan
 

Transcript of Doug Keegan on Lincoln Radio Journal:

Before we get started with the cash for clunkers program, you had mentioned that you wanted to give us an update on the mortgage assistance program?

A couple of weeks ago on July 1st, Housing Secretary Shaun Donovan announced that the Obama administration would be widening its mortgage refinancing program. He said that borrowers whose loans are now worth up to 125% of their home's value are now eligible to refinance under the program. Previously, the limit was 105%.

Here's an example. Say you bought your house for $200,000 at the height of the housing market. It's now appraised at $160,000 but you still owe $190,000 on it, meaning your mortgage is 18% more than what your home is worth. Under the old requirements, you weren't eligible to refinance. Under the new requirements, you're eligible to refinance.

This program was set up to help stem the rate of foreclosures by allowing struggling homeowners to either refinance or get a loan modification. The hope was and is that with a lower monthly payment, borrowers will be able to stay in their homes.

This move seems like it is intended for hard-hit areas. Where are those areas and is this program working?

The hardest hit areas are Nevada, California and Florida. For example, in Las Vegas, 67% of homeowners owe more than their homes are worth. In pockets of California and Florida, real estate values have plummeted more than 50%. Nationwide, some 20 million people owe more on their home than it is worth.

Now with regards to the success of the program, it really has not led to the number of refinancings as originally expected. Since the program went into effect back in March, there have been over 900,000 foreclosures. To be fair, those numbers are a bit skewed because there had been temporary freezes on foreclosure activity and those ended in March. Still, March, April and May marked the highest three-month period on record. So it will be interesting to see the foreclosure activity for June. At this point, Lowman, no one knows if the expansion to the mortgage refinance program will help stem the rate of foreclosures or not. We'll just have to wait and see. You can get more information about the program at www.makinghomeaffoordable.gov.

So what is this new cash for clunkers program?

Bottom line, it's all about giving a jolt to the auto industry while at the same time getting less fuel efficient vehicles off the streets. Thanks to the new Car Allowance Rebate System, otherwise known as CARS, or as I like to say, the cash for clunkers program, you can now turn that old clunker into cash and get up to a $4,500 government voucher towards the purchase of a new car, SUV, minivan, light truck or even a work truck as long as the sticker price of the new vehicle is $45,000 or less. The program starts July 24th and ends November 1st or whenever the $1 billion allocated runs out. And don't let the start date of July 24th deter you from going out now and shopping for the best deal. This government cash is in addition to any dealer incentive and discount.

So I think I have a clunker, how can I tell if it is eligible to be traded in?

For the sake of our discussion, I'll stick to the rules for cars, SUVs, minivans and light trucks. To be eligible, your clunker must be in drivable condition and made in the last 25 years, must have been continuously insured and registered in your name for at least one year leading up to the trade in, and must have a combined city and highway fuel economy value of 18 MPG or less.

To find out if your clunker meets the fuel economy requirement, go to www.fueleconomy.gov.

How much can I get for my clunker?

This is where is can get complicated. For cars and trucks there are 2 thresholds.

If the new car you purchase gets at least 4 MPG more than the car you are turning in, you qualify for $3,500. If the new car gets at least 10 MPG more, you qualify for $4,500.

For SUVs, minivans, and light trucks, if the new vehicle gets at least 2 MPG more, you qualify for $3,500. If the new vehicle gets at least 5 MPG more than the one you are turning in, you qualify for $4,500.

This information and more is available at www.cars.gov. This is the only official website. Please don't be fooled by other websites. They are just trying to sell you something. Stay with the government sites.

Let's say I find out I qualify, would there be any reason not to buy?

Lowman, I am so glad you asked because this decision should really be part of your overall financial plan. In other words, don't let this "giveaway" entice you to buy on impulse. You see, many people may use this "giveaway" as an excuse to buy more car than they can really afford, particularly if they finance the purchase. Behavioral finance tells us that we tend to buy more of something when we finance it. Budget experts say that your car payments should be no more than 12% of your net take-home pay. So the first thing you must do is figure out how much car you can afford to buy before you go shopping. And please don't let anyone talk you into extending the terms of your loan from say 5 to 7 years just so you can fit the purchase into your monthly budget. Just buy a less expensive car or no car at all. If possible, limit your financing to three years.

Second, get pre-approved for the loan before you go car shopping. Why? First you'll be able to shop the rate. And second you'll know how much car you can buy. Also, you will want negotiating power with the dealerships. Already having the financing in place with the dollar amount in mind gives you leverage and bargaining power. Some of the best auto loans out there are through your local credit union.

Third, know the trade-in value of your clunker. If your clunker is worth more than $4,500 you are better off trading it in yourself. The most the government will offer you anyway is $4,500. So know the trade-in value of your clunker before you go to the dear ship.

And finally, recognize that your auto insurance premiums could go up. Since most people buy the least amount of auto insurance on their clunkers, with a new car you'll most likely have higher monthly auto insurance premiums.

But after doing your homework, if you can afford a new car, now is probably the best time ever to buy one. Car dealers are offering incredible incentives. In fact, a financial planner in my office managed to get a $17,000 car for $10,000 through dealer incentives and the clunker voucher. That's incredible.



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