The Golden Handcuffs Shackling Millions of Homeowners

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  • Those who refinanced during the pandemic locked in rates under 3%, less than half of what they might expect to get in today's market.
  • High interest rates and corresponding higher monthly payments are forcing some to reconsider selling their homes.
  • Hesitancy to sell is also affecting home buyers in a low-inventory market.

For those who bought or refinanced their homes during the middle of the pandemic, a prime mortgage rate may have been a blessing. Now, with mortgage rates running high in a hot housing market, a low interest mortgage is tethering some homeowners in place.

Rapidly rising rates

The rapid onset of the COVID-19 pandemic had wide-reaching effects in the world of finance, with stock prices and mortgage rates temporarily crashing. Homeowners with the cash reserves and foresight to refinance their loans during this period were rewarded with some of the lowest interest rates in recent memory.

In early 2020, rates were already relatively low, with the average 30-year mortgage rate sitting below 4%. With the arrival of COVID-19, the federal government attempted to avoid economic slowdown in part by lowering interest rates. This dropping of rates had a ripple effect throughout the lending market, reducing the average 30-year mortgage rate to 2.65% by the end of the year, and culminating in some of the lowest rates American borrowers have ever seen.

However, the economy has recently shown signs of expanding too quickly, as many Americans have noticed in the form of rising inflation. To cool the economy off, the Federal Reserve has taken the opposite of its pandemic-era policy, raising the interest rates that it charges banks. The effect has been widespread in the lending market, with mortgage rates more than doubling in the past two years.

Homeowners crunched

Homeowners who snagged a great rate in 2020 and 2021 have benefited from low monthly payments for the last few years. However, many of those homeowners are now looking to re-enter the housing market, and today's rates could dash their hopes of upsizing or relocating.

The rate you receive on a mortgage has a big impact on your loan. Not only does it determine how much interest you pay a lender over the lifetime of the loan, but it also determines your monthly payments. For example, a homeowner with a $500,000 mortgage today will pay over 50% more each month than a homeowner who borrowed the same amount in the middle of 2021.

And for homeowners who are already strapped for cash thanks to inflation, a higher mortgage payment is a non-starter. As a result of rising rates, families who want to move into a better school district may have to downsize just to make the same monthly mortgage payment. And those needing to upsize may be forced to wait out high rates.

The effect on buyers

Those following the real estate market know that the last year has been a bad time to try to buy a home. Across the country, demand for homes has handily outpaced inventory. And with rising rates sidelining some sellers, the housing market is likely to continue to be imbalanced in the near future.

The mortgage interest rates of years past are gone, and some homeowners who have outgrown their homes can't afford to make a move. For now, buyers and sellers alike will be affected by the Federal Reserve, whose next move will be announced later this week.

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