Maybe Homeowners Are Struggling with Mortgage Loan Amount Lock-In

When
mortgage
rates
surged
off
their
record
lows
in
early
2022,
the
housing
market
ground
to
a
halt.

In
the
span
of
less
than
10
months,
30-year
fixed
mortgage
rates
climbed
from
the
low-3%
range
to
over
7%.

While
a
7%
mortgage
rate
is
historically
“reasonable,”
the
percentage
change
in
such
a
short
period
was
unprecedented.

Mortgage
rates
increased
about
120%
during
that
time,
which
was
actually
worse
than

those
1980s
mortgage
rates
you’ve
heard
about
in
terms
of
velocity
of
change.

The
rapid
ascent
of
interest
rates
was
severe
enough
to
introduce
us
to
a
new
phrase,

mortgage
rate
lock-in.

In
short,
existing
homeowners
became
trapped
in
their
properties
seemingly
overnight
because
they
couldn’t
leave
their
low
rates
behind
and
exchange
them
for
much
higher
ones.

Either
because
it
was
cost-prohibitive
or
simply
unappealing
to
do
so.

And
there
isn’t
a
quick
fix
because
your
typical
homeowner
has
a
30-year
fixed
mortgage
in
the
2-4%
range.

Mortgage
Rates
Have
Come
Down,
But
What
About
Loan
Amounts?

There’s
been
so
much
focus
on

mortgage
rates
that
I
sometimes
feel
like
everyone
forgot
about
sky-high
loan
amounts.

Mortgage
rates
climbed
as
high
as
8%
a
year
ago,
but
have
since
fallen
to
around
6%.
And
can
be
had
for
even
lower
if
you

pay
discount
points.

So
in
some
regard,
mortgage
rate
lock-in
has
eased,
yet
housing
affordability
remains
constricted.

For
the
typical
home
buyer
who
needs
a
mortgage
to
get
the
deal
done,
there
are
two
main
components
of
the
purchase
decision.
The
asking
price
and
the
interest
rate.

As
noted,
rates
are
a
lot
higher
than
they
used
to
be,
but
have
come
down
about
two
percentage
points
from
their
2023
highs.

The
30-year
fixed
hit
7.79%
during
the
week
ended
October
26th,
2023,
which
wasn’t
far
away
from
the
21st
century
high
of
8.64%
set
in
May
2000,
per

Freddie
Mac.

However,
home
prices
haven’t
come
down.
While
many
seem
to
think
there’s
an

inverse
relationship
between
mortgage
rates
and
home
prices,
it’s
simply
not
true.

Sure,
appreciation
may
have
slowed
from
its
unsustainable
pace,
but
prices
continued
to
rise
in
spite
of
markedly
higher
rates.

And
if
we
consider
where
home
prices
were
pre-pandemic
to
where
they
stand
today,
they’re
up
about
50%
nationally.

In
certain
metros,
they’ve
risen
even
more.
For
example,
they’re
up
about
70%
in
Phoenix
since
2019,
per
the

latest
Redfin
data.

So
when
you
look
at
how
mortgage
rates
have
come
down,
you
might
start
to
focus
your
attention
on
home
prices.

While
a
5.75%
mortgage
rate
seems
fairly
palatable
at
this
juncture,
it
might
not
pencil
when
combined
with
a
loan
amount
that
has
doubled.

This
might
explain
why
just
2.5%
of
homes
changed
hands
in
the
first
eight
months
of
2024,
per
Redfin,
the
lowest
turnover
rate
in
decades.
Listings
are
also
at
the
lowest
level
in
over
a
decade
(since
at
least
2012).

An
Example
of
Loan
Amount
Lock-In

Let’s
consider
a
median-priced
home
in
Phoenix,
Arizona.
It
used
to
be
$265,000
back
in
August
2019,
per
Redfin.

Today,
it’s
closer
to
$450,000.
Yes,
that’s
the
70%
increase
I
referred
to
earlier.
Now
let’s
imagine
the

home
buyer
put
down
20%
to
avoid
PMI
and
get
a
better
mortgage
rate.

We
might
be
looking
at
a
rate
of
3.50%
on
a
30-year
fixed
back
in
mid-2019.
Today,
that
rate
could
be
closer
to
5.75%.

When
we
factor
in
both
the
higher
mortgage
rate
and
much
higher
loan
amount,
it’s
a
difference
of
roughly
$1,150
per
month.
Just
in
principal
and
interest.

The
down
payment
is
also
$90,000
versus
$53,000,
or
$37,000
higher,
which
could
be
deal-breaker
for
many.

This
explains
why
so
few
people
are
buying
homes
today.
The
one-two
punch
of
a
higher
mortgage
rate
AND
higher
sales
price
have
put
it
out
of
reach.

But
what’s
interesting
is
if
the
loan
amount
was
the
same,
the
difference
would
only
be
about
$285,
even
w/
a
rate
of
5.75%.

So
you
can’t
really
blame
high
rates
too
much
at
this
point.
Sure,
$300
is
more
money,
but
it’s
not
that
much
more
money
for
a
monthly
mortgage
payment.

And
it’s
a
lot
better
than
the
$1,150
difference
with
the
higher
loan
amount.

In
other
words,
you
could
argue
that
existing
homeowners
looking
to
move
aren’t
locked
in
by
their
mortgage
rate
so
much
as
they
are
the
loan
amount.

What
You
Can
Do
to
Combat
Loan
Amount
Lock-In

If
you
already
own
a
home
and
are
struggling
to
comprehend
how
a
move
could
be
possible,
there’s
a
possible
solution.

I
actually
had
a
friend
do
this
last
spring.
He
was
moving
into
a
bigger
home
in
a
nicer
neighborhood,
despite
holding
a
2.75%
30-year
fixed
mortgage
rate.

To
deal
with
the
sharp
increase
in
interest,

he
used
sales
proceeds
from
the
sale
of
his
old
home
and
applied
them
toward
the
new
mortgage.

The
result
was
a
much
smaller
balance,
despite
a
higher-rate
mortgage.
This
meant
far
less
interest
accrued,
despite
monthly
payments
being
higher.

He
did
this
when
rates
were
in
the
7%
range.
There’s
a
good
chance
he’ll
apply
for
a

rate
and
term
refinance
to
get
a
rate
in
the
5s,
at
which
point
he
can
go
with
a
new
30-year
term
and
lower
his
monthly.

If
he
prefers,
he
can

make
extra
payments
to
principal
to
continue
saving
on
interest,
or
simply
enjoy
the
payment
relief.

Either
way,
knocking
down
the
loan
amount
to
something
more
comparable
to
what
he
had
before,
using
sales
proceeds,
is
one
way
to
bridge
the
gap.

And
the
big
silver
lining
for
a
lot
of
existing
locked-in
homeowners
is
they
got
in
cheap
and
have
a
ton
of

home
equity
at
their
disposal.

Before
creating
this
site,
I
worked
as
an
account
executive
for
a
wholesale
mortgage
lender
in
Los
Angeles.
My
hands-on
experience
in
the
early
2000s
inspired
me
to
begin
writing
about
mortgages
18
years
ago
to
help
prospective
(and
existing)
home
buyers
better
navigate
the
home
loan
process.
Follow
me
on
Twitter
for
hot
takes.

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