Mortgage rate lock-in gap: some states have it worse in U.S. housing market

With mortgage rates soaring, America’s housing market is stuck in a “mortgage rate lock-in effect,” where homeowners are unwilling to sell since it means they’ll have to trade in their low-interest-rate loan for one at today’s higher rates.

A new report by U.S. News & World Report has found 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 interest rate the homeowners are currently paying subtracted from the rate available to them for purchasing another property. This gap can fluctuate based on location, due to things like local real estate laws or the number of lenders in the area.

Here are the report’s key findings:

• The average rate on outstanding mortgages in the U.S. is 4.1%, according to the Federal Housing Finance Agency.
• The average rate on a new mortgage in the U.S. (as of July 2, when the study was conducted) is 7.25%.
• Nationally, the average “lock-in gap” is 3.15 percentage points between rates on new and existing mortgages.
• The national average loan amount is $357,000, so the monthly mortgage payment at 4.1% would be $1,817. With a mortgage at 7.25%, that monthly payment would jump to $2,435. That means homebuyers who buy a new house will end up paying an average of $618 more per month. Plus, homeowners in states with the widest lock-in gaps will experience an even higher cost increase.

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The states with the worst mortgage ‘lock-in gaps’

Colorado has the widest mortgage rate lock-in gap in the country. Here’s how U.S. News & World Report breaks down these numbers:

• Colorado homeowners’ existing mortgage rate is 3.8% (the lowest of any state).
• A new mortgage in Colorado (as of July 2) will get you an average rate of 7.25%. That’s a spread of 3.45 percentage points between rates on new and existing mortgages.
• For the state’s average loan amount of $454,000, a monthly payment at 3.8% would be $2,077. That would jump to $3,097 at 7.25%. That’s a difference of $1,020, or 49.1%.

Behind Colorado with the widest lock-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).

The states with the narrowest lock-in gaps

Homeowners in states with slim lock-in gaps will see less of a cost increase if they sell their homes and then buy at current mortgage rates.

Texas boasts the narrowest mortgage rate lock-in gap in the country. Here’s how that plays out:

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• Texas homeowners are holding on to mortgages with rates averaging 4.3%, one of the country’s highest.
• Current mortgage rates offered in Texas (as of July 2) average 6.85%, the lowest of any state.
• That’s a spread of 2.55 percentage points between rates on new and existing mortgages.
• For Texas’ average loan amount of $336,000, a monthly payment at 4.3% would be $1,862. That would increase to $2,202 at 6.85%. That’s a difference of $340 per month.

Behind Texas with the narrowest lock-in gaps are New York (2.575 percentage points), New Mexico (2.575), Michigan (2.675), and Rhode Island (2.775).

How much more would repeat homebuyers pay per month?

In states with high housing costs, homeowners’ mortgage payments could go up by more than $1,000 per month if they sold and then bought at current mortgage rates.

The study found that homeowners in Hawaii would see their average monthly payments go up the most, by $1,591.

California homeowners would see their average monthly payments spike by $1,470.

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Other states with the highest potential payment spikes include the following:

• District of Columbia would see their payments go up by $1,193.
• Utah would see their payments go up by $1,083.
• Washington would see their payments go up by $1,058.
• Colorado would see their payments go up by $1,020.

Look before you leap

“My business is definitely feeling the impact of higher interest rates on our ability to resell projects,” says real estate investor Doug Greene, of Signature Properties in Philadephia. “Buyers are reluctant to take the leap at a much higher rate and monthly payment.”

Although these statistics can indeed be sobering, there’s still some hope on the horizon for homebuyers, particularly if they already own a home and have built up some equity.

“Depending on when they purchased their home, they could have substantial equity,” says Rose Krieger, senior home loan specialist at Churchill Mortgage in Spokane Valley, WA. “This means they may have a larger down payment to compensate for the rate and price.”

If that down payment is 20% or more, homeowners would also eliminate the need for mortgage insurance on a conventional loan, further lowering their proposed monthly payment.

But the answer is never one size fits all, says Shmuel Shayowitz, president and chief lending officer of private mortgage banker Approved Funding. So you should always consult a mortgage and financial adviser to crunch the numbers before deciding whether to sell or stay put.

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