Putting mortgage rate movements into perspective

Mortgage websites like HSH.com focus on the daily, weekly and monthly movements of mortgage rates. But should you hear that "mortgage rates jumped (or declined) this week" how do these fluctuations in mortgage rates translate into higher or lower monthly payments, and just how much of a monetary difference are we talking about?

Exactly what does “mortgage rates moved up or down by a few basis points” really mean to the borrower on the street who is debating whether it’s time to lock in that mortgage rate or jump into a mortgage refinance?

We routinely advise borrowers not to “play the mortgage rate waiting game” -- that is, waiting for rates to fall just a little bit lower before you lock in. Since mortgage rates always seem to rise more quickly than they fall, doing so can leave you on the wrong side of an ill-advised wager. So again, how do you know how much a mortgage rate that “just edged upward” is really going to impact your affordability?

Over a month’s worth of rate movements

Let's take a look at mortgage rates earlier in 2023, when financial markets were in a period of considerable volatility and see how fluctuations in mortgage rates affect your immediate and long-term mortgage costs. Looking at a six week window -- a fairly common period for a mortgage application to work its way to the closing table -- can be instructive.

Using a mortgage amount of $300,000 and the weekly average rate for conforming 30-year fixed-rate mortgages, you can see how costs would have changed as mortgage rates changed over that time:

Related: Calculate monthly payments, total costs and amortization schedules

As you can see, when there are small weekly fluctuations in mortgage rates the monthly payment isn't affected to a great degree. When mortgage rates fell from 6.73 percent to 6.60 percent in mid-March, prospective borrowers would have saved $25.83 per month with the lower rate. Of course, the reverse was true when rates rose from 6.32% at the start of the period to the 6.73% high point, where the increase was a more considerable $80.98 per month. For most borrowers, a small increase isn't enough to change their perspective as to whether or not they will buy or refinance a home, but the larger one can change the finances a bit.

That said, even small differences in rates add up over time, and these cost differences become a bit more dramatic when you look at the money you save on interest payments over the life of a loan. Comparing the eight basis point increase between March 2 and March 9, getting a mortgage rate of 6.65 percent compared to 6.73 percent would have saved you $5,723.20 in total interest cost.

It also bears considering that payment fluctuations are far more substantial when the mortgage amount is higher; a $100,000 loan amount would have seen just one-third the difference of the above -- as in our initial 6.73 to 6.60 percent example, only $8.61 per month.

Highs and lows

Certainly, over a given number of weeks, mortgage rates can move up or down quite significantly or even barely move at all. In the early part of the period we're examining above, rates moved up by more than one-third of a percentage point. However, in the four weeks that preceded the sample above, mortgage rates held nearly steady, with just a six basis point (0.06%) difference between the high and low over that time. Holding out for a lower rate before locking in during the February-March period might have cost you as rates kicked higher, while hoping for rates to fall in the four-week period before it would have wasted a month of potential refinance savings.

You can't know in advance what may happen to rates, for better or worse. That's why it's important to act quickly when rates are in your target range. Even the best forecast for mortgage rates is likely to be off the mark in some way or another.

Mortgage rates: Just one component

Keith Gumbinger, vice president of HSH.com, says borrowers shouldn’t get too hung up on weekly fluctuations since an interest rate is just one component of a mortgage transaction, and it's possible to lower your interest rate if needed by paying discount "points". In fact, a successful home purchase or refinance transaction requires many factors to fall into place at the same time, and the interest rate on a mortgage is just one of them.

“I don’t think you’re going to find anyone who says ‘it’s going to cost me $5,700 more over the course of 30 years so I’m not going to buy a home.’ People don’t think like that,” he says.

While it won't help you to qualify for a new mortgage, if your heart is set on a specific interest rate but the market has failed to deliver it, you can actually prepay a mortgage to achieve the same total loan costs you would have had if your mortgage actually had that desired interest rate. HSH's LowerRate Prepayment calculator can show you just how much prepayment you'll need to hit a specific interest rate goal. For example, if you want the total interest cost of a 6.32% mortgage but your loan has a 6.73% interest rate, you'll need to pay an additional $34.74 per month (or make a one-time prepayment of $4,124.64 with the very first mortgage payment).

Regardless, “If you’re actively shopping for a mortgage, a dip in mortgage rates might be an unexpected bonus, while a small weekly increase in rates should not be enough to impact your transaction.”

If you save $26 a month thanks to a dip in rates (as was the case on March 16 compared to March 9), that’s a savings of $310 a year—possibly enough to cover your cable or utility bill for a month or two, Gumbinger explains.

What’s the point?

The point here is that active mortgage shoppers should have a range of mortgage rates in mind that will make their transaction work, and be prepared to get their deal in place when rates move into that range, rather than waiting and hoping for even more favorable conditions. It's always good to have contingency plans in place -- funds available to pay points or reduce the loan amount being borrowed, for example -- just in case a larger flare in interest rates should come along. With mortgage rates often more likely to rise quickly than fall substantially in a short time period, your reward for waiting for lower rates might be slight, but a swing in the other direction could increase your costs or even make your deal unworkable.

This article was revised and updated by Keith Gumbinger.