Despite the fact that locking in fixed mortgage rates between 2% and 3% is considered to be a huge financial win, especially now that rates are hovering above 6%, it’s also a bit of a burden. Some homeowners, who locked in historically low rates during the pandemic, are now feeling trapped, or as one homeowner tells Fortune: “We’re prisoners.” They’d like to sell their home and buy something else; however, elevated mortgage rates mean the increased monthly mortgage payment to do so would be financially unbearable.
Look no further than Jennifer Lovelace. The 38-year-old realtor and owner of a local surf school in St. Augustine, Fla., told Fortune that she purchased her home in January 2020 for $215,000, with a 30-year FHA loan at a rate of 3.25%. Her monthly mortgage payment, after putting 10% down, is around $1,300 (including taxes, insurance, and her HOA dues). She and her partner bought their townhouse, thinking it’d be the “perfect starter [home],” and that they’d eventually be able to sell it or rent it out in a couple of years. But home values in her area have gone up along with interest rates, making it “impossible” for them to even consider moving up.
Lovelace told Fortune that it’s “frustrating” living in a 1,000-square-feet home, with her two sons, ages five and eight. But the only way they can afford to move is to go inland, which isn’t feasible for them.
“We’re staying put here for right now, waiting to see if the rates come down or prices come down,” Lovelace said. Still, she’s looking at mortgage rates and homes every single day.
Lovelace isn’t alone. The so-called “lock-in effect” is constraining both the supply and demand sides of the housing market as it sidelines move-up sellers and buyers across the nation. Which explains why mortgage purchase applications remain down 38% on a year-over-year basis.
Freddy Chica, a 36-year-old federal government employee, recently had a baby and would like to sell his current home and purchase a slightly bigger home, but the numbers just don’t make financial sense right now.
Chica told Fortune that he purchased his home in 2020 and locked in a 30-year fixed mortgage rate at 3.25%. After putting 5% down on his home in Miami, which cost around $207,000, Chica said, his monthly mortgage payment (including taxes and insurance) comes out to $1,263. When he and his partner had their baby, they started looking for a bigger place that was slightly bigger than his 1,100-square-foot two-bedroom condo. He quickly realized it’d cost more than double what he’s paying right now to move up.
Chica was looking at townhomes in his area that were mostly around $400,000, with a rate around 6.5%. If he was to put 20% down on a $400,000 home and take on a mortgage for $320,000 at a 30-year fixed rate at 6.5%, his monthly payment (not including taxes and insurance) would be $2,023. That’d be a huge jump from his current mortgage payment of $856 per month.
“We’re [looking into] getting maybe a couple extra hundred square feet and maybe an extra bedroom,” Chica told Fortune, adding that that’s not enough to justify more than doubling his monthly mortgage payment. “It doesn’t make sense. So it’s hard.”
Chica and his partner have decided to stay put for now and try to free up some space in their home, by using up the attic space, remodeling a bit to build more shelves, and getting rid of stuff they don’t need.
“It just doesn’t make any sense to sell,” Chica said, adding later that they’re planning to stay another year or two and watch the market in the meantime, looking for rates to go down and prices to stabilize before moving. And at that point, Chica said, he’d still probably keep the place and rent it out. Chica said it was great to have his home at a low rate, but “it really sucks” being stuck.
“I want my baby to have more space to run around…[but] it kind of leaves you a little stuck,” Chica said, referring to his low mortgage rate that’s keeping him from moving.
Chris Noguera, a 27-year-old in software sales, locked in a 30-year fixed rate at 2.625% in October 2020 for his home in North Lake, Texas. He purchased the home for $420,000 and put 5% down, and told Fortune that his monthly payment is around $2,900.
He’d like to move, but after working with his real estate agent and mortgage broker to put down an offer on a larger house, Noguera realized it wasn’t feasible.
“We live our lives month to month, in terms of monthly bills,” Noguera told Fortune. “The monthly payment just would have been way too high… We just have to wait now…with the current market, we’re not going to be able to move.”
Noguera’s story isn’t unique: There’s a lot of sidelined housing supply and demand right now.
Mason Martinez, a 34-year-old realtor based in Tucson, bought his home in 2021 at a 30-year fixed rate at 2.75% (with a VA loan). He purchased the home for around $440,000, put $80,000 down, and took on a $360,000 mortgage. Martinez’s monthly mortgage payment, he told Fortune, comes out to $2,003 (with taxes and insurance). He and his wife would like to get a home with a bigger backyard for their three kids; however, Martinez says “it’s just not in the cards right now..it just doesn’t make sense, right now, to move, but we absolutely have dreams of moving,” and would’ve done so by now, if rates weren’t where they’re currently at.
