The rates are falling at all lending institutions, because of the old supply and demand doctrine.  There are ample mortgage funds available but since the housing economy went down in the last 6 months, there is no place to put these dollars.  Lending institutions are scrambling to devise ways of increasing their market share and get rid of accumulating dollars in their coffers.

More and more signs are popping up on street corners adjacent to bank branches indicating "unbelievable" mortgage rates.  Just the other day, while walking the dog,  I read a huge billboard size sign: "we offer 5 year mortgages from 4.74%, see inside for details." I parked my dog & went in to the bank to pick the brain of one of their mortgage officers.

Ten minutes later I came out to apologize to my dog for wasting his time, but indeed my time was wasted in the bank.  As I waited to speak to someone, another smaller sign caught my eye.  It said the 5 year rate was 7.15%. A very nice loans officer greeted me and brought me into her office.  I said I was enquiring on her wonderful mortgage rate advertized outside.  She started to fill out an application.  I said to her before we get going on the application, I wanted to know the difference between the rate outside and the rate inside for a 5 year term mortgage.  The answer was obvious to me but I wanted to hear it from her.  The rate outside is a floating rate mortgage, discounted for the first 6 months.  The rate is adjusted every six months for the whole 5 years, but the payment is fixed.  The mortgage rate inside was the guaranteed rate for the term.  I pretended to get very upset by the false claim posted outside, and she started to cry.  Apparently, I was not the only person to get sucked in by the sign outside, only to get disappointed by the "details" inside.  I had been the fourth person that day to get upset.  I then confessed to her who I was, and that I knew what the answer was going to be.  I asked her to confide in me the number of people who did indeed sign up for the deal.  The number of unsuspecting Consumers to take that dangerous product floored me.  Let me explain the danger. The Consumer is asked to sign up with ABC lender for a five year term.  The Consumer only has knowledge of the rate for the first six months.  The rate is adjusted to the bank's prime rate every six months thereafter.  The mortgage payment however is not adjusted unless you ask.  It is a great product when the rates are high.  If the rates happen to come down, more of your payment gets applied to the principal.  The inverse is also true.  If the rates happen to go up , less of your payment gets applied to the principal.  If the rates happen to go up more than .5% (amortized over 25 years), your mortgage payment would no longer be able to cover even the interest portion, therefore your mortgage principal starts to go up.  All these loans officers will tell you that you may increase your payment at anytime to make up the difference, or you may choose to freeze your rate to whatever the 5 year term mortgage rate is at that time.   How many of us can afford to increase our mortgage payments every six months?   How many of us watch the interest rates so closely that we would know when to "freeze" the rates? 

When and if we chose to freeze the rate, which rate would we get?  Would it be the posted rate at the bank or a discounted rate? 

You can bet the first one would apply.  If you see a sign suggesting that a particular bank is offering rates that are vastly inferior to the posted rates, then it is probably a variable rate product. In all honesty, there is too much chance that the rates will escalate to take a variable rate mortgage.  The discounted rates are so low now that you should choose a fixed rate for at least 5 years, although the 7 & 10 year rates are also very attractive.