A Yahoo! Finance blogger named Rick Newman claims Ben Bernanke cost him $53,000 on his recently acquired mortgage.
The issue revolves around the latest testimony from the Federal Reserve boss, who revealed the Fed could taper purchases of mortgage-backed securities (MBS) in the not-so-distant future.
If the Fed tapers its purchases, supply of MBS will essentially rise above demand, and home loan interest rates will increase.
The funny thing is Bernanke didn’t actually take any action, he just said it was possible the Fed could taper MBS purchases at some point this year. Still, it was enough to rattle investors and send mortgage rates flying.
In just weeks, 30-year fixed rates climbed from around 3.5% to just over 4%.
Blogger Missed Out on a 3.5% Mortgage Rate
Newman said he found a home to purchase in late April, and in early May was able to lock in a mortgage rate of 3.5%, which was pretty much the floor for the 30-year fixed.
He instead decided to float his rate, with the hope rates would fall even more between the time his loan was processed and closed.
Unfortunately, he got caught up in Bernanke’s drama, and had difficulty sleeping at night as he began to play the market. In fact, he even considered walking away from the house because of the rise in rates.
Finally, Newman decided to just give up hope on a rate below 4% and take a rate of 4.125%, knowing that time was of the essence and any more gambling could really land him in a tough spot.
As a result of his decision to float, as opposed to lock, Newman wound up with a monthly mortgage payment that is $148.11 higher than what it could have been.
While that may not sound too bad, if he holds his mortgage for the full term, he’ll be looking at an additional $53,319.60 in interest paid.
He will also build home equity slower because of the higher interest rate, which could be an issue if selling or refinancing early.
Still, 4.125% is nothing to scoff at, seeing that rates have been significantly higher historically.
But the lesson here is that mortgage rates are unpredictable, and can rise or fall for any number of reasons.
Newman could have just locked his rate and slept soundly, knowing he was good to go at 3.5%. But he wanted more. The sad thing is there wasn’t really much upside to a slightly lower rate.
How low did he think rates would fall? He couldn’t possibly have envisioned a rate below 3%, so perhaps 3.25%?
If he did manage to snag 3.25%, he would have only saved about $58 a month and just over $20,000 if he held the mortgage to term.
Tip: As mortgage rates move lower, the payment and interest savings decrease and are thus less attractive.
What Can He Do About It?
Anyway, he knows he messed up, and he admitted it. And it’s admirable that he told the world about it. Respect.
But enough about what he did wrong – how could he make up for it? Well, what he could do to minimize the impact of the higher rate is prepay his mortgage faster.
If he makes mortgage payments that are $200 higher than necessary every month, he can reduce his total interest expense to below that of the original 3.5% rate.
His total interest paid would drop to just above $254,000, compared to the $257,000 or so dollars he would have paid if he secured the 3.5% rate and made standard payments. He’d also shave nearly five years off his mortgage.
Assuming he just pays his 4.125% mortgage as scheduled, he’ll wind up spending more than $310,000 on interest.
So it’s not too late to make things right, though Newman may not want to make larger mortgage payments.
It’s not a fix-all, but if he has no better plan for the money, he could reduce interest costs and feel a little bit better about missing the boat.
Read more: Pay off the mortgage or invest?
(photo: Medill DC)