As mortgage rates have soared, the American housing market has fallen into a “mortgage rate lock-in effect,” with homeowners unwilling to sell because it would mean they would have to trade their lower-interest loans for their current higher-interest loans.
A new report from U.S. News & World Report finds that this lock-in effect is much worse in some states than others.
It all depends on the state's “lock-in gap,” which is the average mortgage rate homeowners currently pay minus the interest rate they could qualify for if they were to purchase another property. This gap can vary from place to place depending on local real estate laws, the number of lenders in the area, and more.
The “lock-in gap” can vary from location to location depending on local real estate laws, the number of lenders in the area, etc. whitcomberd – stock.adobe.com
Key findings of the report include:
According to the Federal Housing Finance Agency, the average interest rate on outstanding mortgages in the U.S. is 4.1%. The average interest rate on new mortgages in the U.S. (as of July 2, when the survey was conducted) is 7.25%. Nationwide, the average “fixed rate spread” between new and existing mortgage interest rates is 3.15 percentage points. With a national average loan amount of $357,000, a 4.1% mortgage would result in a monthly payment of $1,817. With a mortgage rate of 7.25%, the monthly payment would jump to $2,435. That means homebuyers purchasing a new home would pay an average of $618 more per month. Additionally, homeowners in states with the largest fixed rate spreads would experience an even larger increase in costs. Nationwide, the average “fixed rate spread” between new and existing mortgage interest rates is 3.15 percentage points. US News & World Report
States with the most severe mortgage “lock-in gap”
Colorado has the widest mortgage rate fixing gap in the country. U.S. News & World Report breaks down the numbers this way:
Existing mortgage interest rates for Colorado homeowners are at 3.8% (lowest of all states). If you take out a new mortgage in Colorado (as of July 2), the average interest rate is 7.25%. This means the difference between interest rates for a new mortgage and an existing mortgage is 3.45 percentage points. The average loan amount in the state is $454,000, but at a 3.8% interest rate, your monthly payment would be $2,077. At 7.25%, that would jump to $3,097. That's a difference of $1,020, or 49.1%. Existing mortgage interest rates for Colorado homeowners are at 3.8%, lowest of all states. Jacob – stock.adobe.com
After Colorado, the states with the largest locked-in gaps are Utah (3.445 percentage points), Iowa (3.375), Minnesota (3.35), North Dakota (3.35), Oregon (3.35), South Dakota (3.35), and Washington (3.35).
States with the narrowest lock-in gap
Homeowners in states with smaller locked-in gaps would see smaller increases in costs if they sold their home and bought one at current mortgage rates.
Texas has the tightest mortgage interest rate lock-in ranges in the nation. Here's how it works:
Texas homeowners have an average mortgage interest rate of 4.3%, one of the highest in the nation. Current mortgage rates in Texas (as of July 2) average 6.85%, the lowest in the nation. This means the interest rate difference between new and existing mortgages is 2.55 percentage points. For the average Texas mortgage of $336,000, a 4.3% interest rate would result in a monthly payment of $1,862. At 6.85%, that would increase to $2,202. That's a difference of $340 per month.
After Texas, the states with the narrowest locked-in gaps are New York (2.575 percentage points), New Mexico (2.575), Michigan (2.675), and Rhode Island (2.775).
After Texas, New York has the second narrowest lock-in gap (2.575 percentage points). bilanol – stock.adobe.com
How much more will repeat homebuyers end up paying each month?
In states with high housing costs, homeowners who sell and then buy a home at current mortgage rates could see their mortgage payments increase by more than $1,000 a month.
The study found that Hawaii homeowners will see the biggest increase in their average monthly payments, at $1,591.
California homeowners would see their average monthly payments increase by $1,470.
Start and end your day informed with our newsletter
Morning Report and Evening Update: Your source for today's top stories
Thank you for your registration!
Other states most likely to see a spike in payments include:
In the District of Columbia, payments would increase by $1,193. In Utah, payments would increase by $1,083. In Washington, payments would increase by $1,058. In Colorado, payments would increase by $1,020.
Crossing a bridge only after checking it thoroughly
“The impact of rising interest rates on a project's ability to resell is definitely being felt by my firm,” says Doug Green, a real estate investor with Signature Properties in Philadelphia. “Buyers are hesitant to take the plunge because interest rates and monthly payments are so much higher.”
While these statistics are certainly grim, there is still some hope on the horizon, especially for homebuyers who already own a home and have built up some equity.
“Depending on when you bought your home, you may have a lot of equity,” says Rose Krieger, senior mortgage specialist at Churchill Mortgage in Spokane Valley, Wash. “That means you may be able to put a larger down payment aside to make up for interest rates and price.”
With a down payment of 20 percent or more, homeowners also eliminate the need for mortgage insurance on a conventional loan, further lowering the proposed monthly payment.
But the answer is by no means one size fits all, says Shmuel Shaiowitz, president and chief lending officer at Approved Funding, a private mortgage bank, so be sure to speak with a mortgage and financial advisor to run the numbers before deciding whether to sell or hold on.