Mortgage Rates: Lock In or Float?

In last week's Primary Mortgage Market Survey, Freddie Mac (FRE Quote) reported that rates for a 30-year fixed rate mortgage were up 52 basis points from the prior week to 6.46% with 0.6 points -- the biggest week-to-week rise since 1987. (A basis point is one hundredth of a percent.) This record rise comes on the heels of a record week-to-week decline of 42 basis points just last month.

The fact is, it's difficult to predict where rates are headed. Although the federal funds rate contributes to the direction of mortgage rates, the two are not in lockstep -- you can't expect mortgage rates to go down just because the Federal Reserve implements another rate cut. Instead, mortgage rates correlate very strongly with yields on 10-year U.S. Treasury notes. And predicting the direction of U.S. Treasuries is like predicting the direction of the stock market -- it's extremely difficult for experienced investors, much less first-time homebuyers.

So what should you do? Since you can't predict where rates will go, the answer largely depends on your financial situation. If you can't afford to buy if rates go any higher, consider locking in now. Even just a quarter-percentage-point rise in rates on a $200,000 mortgage loan translates to $33 more per month and close to $11,800 more in interest payments over the life of the loan. Check out the online mortgage calculator from BankingMyWay.com to see how a rate change will affect your monthly payments.

If you are a risk-taker by nature and can still afford your home if rates rise even further, then floating is always an option. There's a chance that the thawing credit markets will bring rates down, and you always have the opportunity to win big. But floating also means you might lose big. Just remember that gambling on the short-term direction of mortgage rates is like speculating where the stock market is headed. In short, trying to time the market is rarely a winning investment strategy.