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With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

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?

What is a “basis point”?

A basis point is 1/100 of a percentage point. For example, if mortgage rates rose 10 basis points, mortgage rates rose by 0.10 percent.

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 2021, when the market was just a bit volatile 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:

Week ending date

Mortgage rate

Monthly payment

Total interest paid

Total payments

03/11/21 3.05% $1,272.92 $158,249.88 $458,249.88
03/18/21 3.09% $1,279.42 $160,591.32 $460,591.32
03/25/21 3.17% $1,292.48 $165,293.96 $465,293.96
04/01/21 3.18% $1,294.12 $165,883.63 $465,883.63
04/08/21 3.13% $1,285.94 $162,939.35 $462,939.35
04/15/21 3.04% $1,271.29 $157,665.55 $457,665.55

Related: Calculate monthly payments, total costs and amortization schedules

As you can see, such small weekly fluctuations in mortgage rates don’t tend to affect the monthly payment to a great degree. When mortgage rates fell from 3.18 percent to 3.04 percent from the beginning to the middle of April, prospective borrowers would have saved $22.83 with that lower rate. The reverse was true when rates rose from 3.05% at the start of the period to the 3.18% high point. For most borrowers, this isn't enough to change their perspective as to whether or not they will buy or refinance a home.

That said, even small differences in rates add up over time. These cost differences become a bit more dramatic when you look at the money you save on interest payments over time. Comparing the two points in time above, a mortgage rate of 3.04 percent compared to 3.18 percent would have saved you $8,218.08 in total interest.

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 a difference of $7.61 per month, for example.

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. Leading into the early part of the period we're examining above, rates moved up by more than one-third of a percentage point; as we write this, mortgage rates just finished a seven-week period where the difference between the high and low point was just two basis points (0.02%). Holding out for a lower rate before locking in during this earlier period would have actually cost you, while waiting for rates to fall in the second period 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 over six weeks

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 $8,000 more over the course of 30 years so I’m not going to buy a home.’ People don’t think like that,” he says.

If your heart is set on a specific interest rate but the market has failed to deliver it, you can actually prepay your 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 3.04% mortgage but your loan has a 3.18% interest rate, you'll need to pay an additional $35.32 per month (or make a one-time prepayment of $5,263.34).

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 $23 a month thanks to a dip in rates, that’s a savings of $276 a year—enough to cover your cable 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. With mortgage rates often more likely to rise than fall, your reward for waiting might be slight, and 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.

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