5-year bonds rates sank to 3.36% today, their lowest yield since September 2005.  Meanwhile, 5-year fixed mortgages (which normally hinge off bond yields) are still quoted in the high 5’% range. 

We want to say that’s ludicrous and that fixed rates must start falling soon.  In our gut we expect them to.  But, this is the credit market, and anything goes when fear and uncertainty abound.  Spreads could theoretically keep expanding for months (keeping fixed rates high) until the subprime tidal wave passes.

In the meantime, variable rates seem pretty attractive–even at a chintzy discount of prime – 0.50%.  If you’re leaning towards a fixed, remember, you can always lock in a variable 6-12 months from now if fixed-rate spreads deflate and rates fall.

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Side Bar:  If you want a variable mortgage with the intention of converting to a fixed rate, first ask your mortgage planner what rate you’ll convert into.  Many big banks for example, will convert you into a rate that’s only 1% to 1.25% off their stratospheric posted rates.  Certain non-bank lenders are much more generous and let you convert into the lowest available broker rate.