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The Irrational Woodheads of the Mortgage Market
By Jonathan Haeber
CMR Columnist
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Bankrate columnist Holden Lewis came across what he calls a delightful word: Woodhead refers to homeowners who refuse to refinance their mortgage to a fixed rate, even though rates are beginning to rise--and may potentially rise to twice their current rates.
Refinance Your ARM Mortgage
According to Lewis, now is the time to refinance. The years 2001 through 2005 saw unprecedented low rates in U.S. mortgage history. According to Lewis, the term "woodhead" was coined by the former chief economist for Freddie Mac, Robert Van Order. It was meant to define stubbornly irrational borrowers who failed to take advantage of fixed rates on their mortgage, especially when mortgage rates were so low.
Woodhead, Blockhead--One and the Same
Woodhead hearkens back to "blockhead," a similar epithet for an individual who fails to think rationally. Although, some people may say otherwise, this may be your last chance to refinance to a lower or fixed mortgage rate. Even though your up-front transaction costs may be higher, it could save you in the long run. Over the lifetime of a $300,000 loan, for example, the difference between an 8-percent rate and a 5-percent rate means savings of $212,701.
There's good news on the flipside, however. For those of us who are smart enough to get our loans fixed, we can take advantage the irrational among us. Lewis quotes essayist Arnold Kling, who says that the rest of us benefit from woodhead behavior. For example: "Banks can afford to issue credit cards with no annual fee because woodheads carry balances and incur interest charges."
About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home and took a self-taught crash course in home mortgages.
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