Everyone already knows that high interest rates are currently making housing affordability an impossibility for many new buyers. The main aspect about high rates, particularly when they are persistent and staying higher, is that homebuyers who jumped into a mortgage before 2022 might be inflicting self-imposed financial damage if they sell their home to go move into a new home.

Most homeowners have a mortgage. So, outside of mandatory life changes, why on earth would you trade a 3% or 4% mortgage rate for a 7.25% mortgage rate?

This is a scenario that hits at home personally for my family, no pun intended. We have been presented an opportunity to move, but our current housing market and the relative prices of the new location are getting in the way. The math of a new home after adjusting taxes higher and a mortgage at current rates (7.25% for a 30-year mortgage) simply do not compute. That’s before even factoring in $15,000 to $20,000 (or more) all-in for moving costs.

According to recent data from Redfin, home listings are on the rise — making the choices available greater for those who need to move or want to move. Unfortunately, Redfin also shows that some 17.2% of U.S. homeowners have a mortgage rate that is 6% or higher. That’s up from 12.3% late in 2023. Redfin points out that this figure could nearly double (like one-third of all mortgage holders) if the current trends do not abate.

Photo by Jon Ogg of construction scene looking rather messy

Just a year ago the markets were prepping for interest rates to be 100 to 200 basis points lower. That hasn’t happened. At issue here is a long-term “lock-in” rate where mortgage holders who have owned since before the Federal Reserve’s rate hike campaign kicked off in 2022. Again, why pay a 7.25% mortgage for a newer home if you are paying 3% now?

Redfin’s data shows that 82.8% of mortgage holders have a mortgage that is under 6%. That figure was more like 92.7% of mortgage holders under 6% back in mid-2022. There has also been an uptick in existing homes being listed for sale. If these buyers are going to be cash buyers then there is no mortgage rate risk. If they need a mortgage, then that move may come with more pain.

Mortgage rates do tend to move toward current rates as time smooths out the numbers. Here are the current percentage of mortgage holders with rates below 5%, 4% and 3% (according to Redfin data):

• Below 5% — some 73.3% have a rate below 5%, down from a record 85.6% in Q1-2022.
• Below 4% — some 55.2% have a rate below 4%, down from a record 65.1% in Q1-2022.
• Below 3% — some 21.3% still have a rate below 3%, down from a record 24.6% in Q1-2022.

All in all, using the data above, over half of all mortgage holders are still locked in at a mortgage rate under 4% — and that rate is more than 3% lower than current mortgage rates. Do that math on a $400,000 note for 30 years without even considering PMI, taxes and insurance and here is what you get:

At 7.25% it will run $2,728.71/month;

At 4% it’s $1,909.66/month;

and at 3% it is just $1,686.42/month.

Whether mortgage rates go up, stay the same or fall may be immaterial for those with life changes happening. Some may be from divorce, some may want geographic changes and some may be for work opportunities as the work-from-home trend keeps reversing for a back-to-the-office workforce. And some buyers and sellers are just finally coming to grips with the notion that low-rates may not come back for quite some time.

If you are feeling stuck by issues outside of your control, you aren’t alone. Too bad that doesn’t make any of us feel any better about it.