Why many homeowners feel trapped by low-rate mortgages

on Aug1
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Bob and Terri Wood, of Mobile, Alabama, with their grandson.

Courtesy: Bob Wood

Bob Wood, 66, has been thinking of selling his home in Mobile, Alabama. The finance professor and his wife, Terri, purchased the 5,000-square foot house with a pool nearly a decade ago. “It’s probably time to downsize,” he said. They would also like to be closer to their grandchildren in Tennessee.

And yet, “we are in the 10th year of a 3.125% 15-year fixed mortgage,” he said. They don’t want to move now and give up that low rate to buy at a higher rate.

“We just don’t want to pay that much in interest.”

Wood is among “a stock of people sitting on very cheap mortgages,” said Tomas Philipson, a professor of public policy studies at the University of Chicago and former acting chair of the White House Council of Economic Advisers. 

Those homeowners would need to finance a new home at a higher rate than the rate they currently hold, adding hundreds of dollars a month to their mortgage payment, which has created an incentive to stay where they are. For them, opting not to move is “the right strategy.”

With home prices and interest rates on the rise, “the consumer is best advised to stay put,” Philipson said.

Rising rates created a ‘golden handcuff’ effect

A house for sale in Arlington, Virginia, in July of 2023.

Saul Loeb | AFP | Getty Images

Rate lock tipping point: 5%

When mortgage rates hit 5% expect a flood of housing inventory, says Compass CEO Robert Reffkin

“The reality of it is, until inflation comes down in a meaningful and sustainable way, mortgage rates are going to stay high,” said Greg McBride, Bankrate’s chief financial analyst. 

In the meantime, the shortage of homes for sale is putting more pressure on prices.

“Dampened affordability remains an issue for interested homebuyers and homeowners seem unwilling to lose their low rate and put their home on the market,” said Sam Khater, Freddie Mac’s chief economist.

‘Uncharted territory’

“In many ways, we’re in uncharted territory right now,” said Jacob Channel, senior economist at LendingTree.

Between 1978 and 1981, mortgage rates similarly doubled from around 9% to more than 18%, compelling more homeowners to hold on to their homes.

However, “mortgage rates weren’t at record lows in the late 70s before they started to skyrocket in the early 80s, nor did home prices increase as rapidly,” Channel said.

Mortgage rates may not return to sub-3% levels again anytime soon — if ever.

Jacob Channel

senior economist at LendingTree

But if history is any guide, “there is a good chance the housing market will eventually pick up steam again like it has in the past,” he added.

“While mortgage rates may not return to sub-3% levels again anytime soon — if ever — there’s no reason to think that they’ll stay as high as they currently are forever, Channel said.

“And if, or when, they do start to fall, we’ll likely see the housing market become more active again.”

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