THE LOCKED IN EFFECT
Updated: 4 days ago
52% of Arizona Mortgages have an interest rate under 4%.
Would you give up a 3% mortgage to buy another home at 7.5%? That’s the dilemma facing millions of Arizona homeowners today. Economists call it the “Mortgage Rate Lock-In Effect,” and it has become one of the reasons fewer existing homes are coming onto the market and keeping the supply of home tight.
During 2020 and 2021, mortgage rates fell to historic lows, allowing many homeowners to purchase or refinance their homes with interest rates between 2% and 4%. Those rates weren't just attractive; they were opportunities that homeowners may never see again.
Today, those same homeowners face a difficult decision. They may want a larger home, a smaller home, or simply a different neighborhood, but selling means giving up their low-interest mortgage and taking on a new loan at a considerably higher rate.
Just How Much Difference Can the Interest Rate Make? ; Let's look at a simple example.
Suppose you have a $350,000 mortgage with a 3% interest rate on a 30-year loan. Your monthly principal and interest payment would be approximately $1,476. Now imagine purchasing another home and borrowing that same $350,000 at a 6.5% interest rate. Your new monthly payment would jump to approximately $2,212. That's an increase of $736 per month, or $8,832 per year! And that's without borrowing a single dollar more. These figures exclude property taxes, insurance, and HOA fees. For a lot of homeowners, that's a difficult financial pill to swallow and for some it is impossible.
How Does This Affect the Housing Market?
When homeowners choose to stay put rather than sell, fewer existing homes become available for prospective buyers. That reduced supply can help support home prices, even when higher mortgage rates are discouraging buyers. It's one of the unusual characteristics of today's housing market: According to the Federal Housing Finance Agency (FHFA) Approximately 31% of outstanding U.S. mortgages have interest rates between 3% and 4%, and just over 50% have rates below 4%. That means half of the mortgage owners have a good reason not to sale.
For Arizona it is an even larger number. 52% of the 1.3 million mortgages in AZ are under 4%. That works out to over 670,000 thousand homeowners with an incentive in Arizona not to sale.
Will the Lock-In Effect Eventually Disappear?
Yes, but probably gradually. Life doesn't stand still simply because mortgage rates are higher. Families grow, children move away, people retire, job opportunities arise, and personal circumstances change. Eventually, these life events outweigh the financial advantages of keeping a low mortgage rate. Additionally, if mortgage rates decline, the financial penalty associated with moving becomes smaller, potentially encouraging more homeowners to put their properties on the market.
The Bottom Line
The mortgage rate lock-in effect is one reason today's housing market behaves differently than markets we've experienced in the past. But here's something worth remembering: While interest rates influence our decisions, they shouldn't necessarily dictate how we live our lives.
Sometimes the right home, the right location, or the right lifestyle is worth more than holding on to yesterday's mortgage rate. If you're considering selling but are concerned about giving up your low-interest mortgage, we'd be happy to help you explore your options.
Jeff, Teresa & Noah Harshman
HomeSmart Fine Homes and Land
Helping Folks on Their Journey Home for Over 22 Years!
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