Insurance, property taxes, and cost of living all impact monthly expenses for homeowners, and in some cases dwarf the interest rate differential. Orion’s AEs and brokers do their best to give our clients every .125 or .250 we can, but if a client’s homeowners insurance just went up by $300 a month, it is a tough situation. And for many, and certainly psychologically, giving up a guaranteed low mortgage payment on a loan that they obtained in 2020 or 2021 is difficult.

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Orion has helped thousands of our brokers provide your clients have a low mortgage rate, which is very good, but the press has been talking about the “lock in” effect where the low rate and payment influences decision making. For your client, upgrading a home may feel daunting. Individually rational choices, in aggregate, are causing a problem. Even if they didn’t buy, millions of homeowners refinanced during the low-rate years. By spring of 2022, over 90 percent of homeowners had a mortgage rate under six percent, many through Orion. Six in ten homeowners still have a mortgage below four percent.

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Fixed-rate mortgages are actually adjustable, thanks to the ready availability of refinancing options, but only in one direction. Borrowers refinance to lower their payments, so rate adjustments are almost exclusively downward. When a buyer refinances, generally speaking, the new lender issues a new mortgage and pays off the original mortgage. The original lender receives back the principal to lend at 6 percent, instead of waiting for a 30-year mortgage to be paid off over the years at 3 percent. As with other voluntary transactions, all parties benefit, including our broker.

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A low mortgage rate is highly desirable, and non-transferable. Once “locked in,” a comparatively low mortgage rate functions as an emotional and economic anchor. Homeowners are less likely to step up the property ladder (vacating their starter home for a larger one, or a more desirable school district), and also less likely to downsize and move on when their needs change. Both the supply(existing homes entering the market) and the demand (people searching for a new one) are suppressed by mortgage rate lock-in. The property market stagnates, and the inventory of homes for sale drops.

Our brokers should remember that families staying put save by not paying high moving costs. Job tenure can increase, children enjoy the same neighborhood and friends, and the monthly financial picture improves. In some states like California property taxes stay low versus buying a new home. On the other hand, some households forego higher-paid employment opportunities due to the financial cost imposed by mortgage lock-in.” Locked-in households were half as likely to move in response to potential wage growth.

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Given the size and variety of the United States mortgage and real estate market, comparisons to other countries are questionable, but other countries have experimented with ways to alleviate lock-in. Other countries don’t have the broker contribution that we do. In the United Kingdom and Canada, many mortgages are portable, meaning you can essentially transfer your mortgage terms from an existing property to a new one. Americans, in general, secure a mortgage for a particular property and must start over, with a new interest rate and repayment terms, to purchase a subsequent one.

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Other international mortgages are assumable, meaning you can sell your mortgage, with its favorable low rates, to a buyer along with the property. Individual owner-occupants must qualify under the original lending terms. In the United States, Orion’s mortgages done through the Federal Housing Administration(FHA), the Department of Veterans’ Affairs (VA), and some Department of Agriculture (USDA) are assumable. But for every other program, by law, there’s no way to detach that loan from the property that serves as its collateral and reattach it to a new property.

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A few weeks ago, the Federal Reserve cut certain rates by 50 basis points and is expected to make another cut before December. But mortgage rates have actually gone up! Unless they slide, we can expect fewer “For Sale” signs and more “Stay Put” decisions, as financial incentives restrict economic mobility. Regardless of the direction of rates, our AEs are here to provide advice to you.

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