Consider Floating Your Mortgage Rate


Interest rates on 30-year fixed rate mortgages (FRMs) have shed close to 1.5 percentage points in the past three months, with no signs of reversing course. If you're applying for a mortgage, you may want to think twice about locking in your mortgage's interest rate.

Many factors drive the direction of mortgage rates. The two primary influences lately have been the ongoing recession and efforts by the Federal Reserve to purchase $500 billion worth of mortgage-backed securities. The plan to purchase securities will continue until June, and many economists believe that an economic recovery is unlikely within the first half of 2009. Given those two factors, the American Bankers Association's Economic Advisory Committee "sees conventional 30-year fixed mortgage rates remaining below five percent for several months."

What does that mean for you? Among other things, it means you’re probably better off letting your mortgage rate float until you close rather than locking in a rate ahead of time.

The potential savings are big. Rates on 30-year FRMs dropped 0.3 percentage points between January 6 and January 15, from 5.36% to 5.06%. Rates on 15-year FRMs dropped roughly the same amount over the same time period, from 5.13% to 4.84%. A 0.3 percentage point decline in a $200,000 30-year FRM translates into $37 less per month, and $13,352 less in interest over the life of the loan. On a 15-year FRM, that same decline results in $31 less in monthly payments, and $5,436 less in total interest.

Of course, there is always the risk that rates could go up in the short term. So if a modest rise in rates would put your dream home out of financial reach, consider locking in. You may miss out on some extra savings if rates drop even lower, but you won't miss the chance to buy your home. 

Rate declines vary by region, so search the mortgage section of for rates in your area. For instance, the Southeast tends to have higher rates than the Southwest -- a 30-year FRM from U.S. Bank (Stock Quote: USB) in Arizona offers a rate of 4.875% while one from Wells Fargo (Stock Quote: WFC) in North Carolina offers a rate of 5.0%.

For more rate offers in your area, go to MainStreet's partner site,, and enter your ZIP code.

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