3% Mortgage Rates: Gift of a Lifetime or Low-Rate House Arrest?
A homeowner planning to relocate or downsize might find the higher costs related to higher mortgage rates too much of a hurdle to clear. What are their options?
![A wrapped gift with a red bow is shaped like a house.](https://cdn.mos.cms.futurecdn.net/oMHvdU8zoZz7JJmpHJTQ5k-415-80.jpg)
For many Americans, homeownership became a reality during the years of ultra-low mortgage rates following the 2008 financial crisis, an environment that essentially lasted all the way up until the Federal Reserve's campaign to raise interest rates, which started last year. Many were even able to take advantage of refinancing opportunities as recently as 2021 or late 2020 when rates dipped below 3%. In fact, over 50% of all outstanding mortgages originated in 2020 or after.
That interest rate dynamic has now completely flipped on its head. Had you been fortunate enough to be able to buy or refinance during that low interest rate period, you are likely counting yourself lucky. For many, that low fixed rate now feels like a gift that keeps on giving.
However, that is not necessarily the case for everyone. For some, it may also start to feel like a sort of low-rate-induced house arrest — they feel trapped in their home.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The average 30-year fixed rate mortgage was 3.1% at the start of 2022. It has now approached 7%. The ability to relocate is starting to feel more like a far-fetched idea rather than a viable opportunity. The math for many no longer works.
Take for example the hypothetical homeowner who wants to move closer to family. They own a $500,000 home with $200,000 in equity. If they sell their home and buy a home of similar value, giving up their 3% mortgage and replacing it at the 7% rate, the new principal and interest payment on that $300,000 mortgage has gone up 58% from $1,265 to $1,996.
Mortgage Rate Math Doesn’t Work for ‘Move-Up’ Buyers
The math for a “move-up” buyer? It simply doesn’t work out. If that same homeowner instead was looking to buy a $600,000 home (so 20% more house), that would mean their monthly payment would go up 110% from $1,265 to $2,661. This is ignoring any increases in property tax or insurance.
Even those looking to downsize won’t catch a break in this new world of higher rates. Take the prior example, but this time consider an elderly homeowner who is struggling to maintain and get around in their larger home and is seeking to relocate to a smaller $400,000 home. Despite reducing their mortgage balance from $300,000 to $200,000, their new monthly payment will have increased from $1,265 to $1,331.
These higher rates have definitely put a damper on home sales, which are down about 23% over the last year. However, despite this fall in the number of sales, prices are essentially flat since this time last year. Homeowners reluctant to give up their low-rate mortgages are certainly a contributing factor, limiting supply.
The longer these high rates persist, we can expect more significant ripple effects throughout the economy, particularly in the context of limited job mobility. This dynamic could prove troublesome, especially in combination with the continued tight labor supply. Consider a homeowner seeking to move for a new job opportunity. Their potential employer will have to up the ante with even more incentives than before. This type of added wage pressure certainly doesn't help the Federal Reserve's efforts to reduce inflation.
No Incentive to Pay Down a 3% Mortgage
So were you fortunate enough to get a fixed-rate mortgage in the 3% range? Enjoy your home and the gift of that low rate as long as possible. With savings rates and CD rates where they are, there is no incentive to pay down that mortgage early.
For those forced to move, whether that be for a job or otherwise, one option to consider is renting out your current home with its associated low-rate mortgage and finding a rental for a couple years to see where these rates and housing markets settle down.
While another option is to just buy at the new higher rate and hope that rates come back down so you can refinance later – you should not count on that outcome. Rates could stay high for quite some time. You should accept that higher rate only if it is something that you will be able to afford long-term.
This is something you should be especially sensitive to with housing prices continuing to be historically elevated. If you were to buy at this new higher rate and housing prices fell, you could find yourself in a situation where you no longer have enough equity in your home to refinance even if rates did fall.
It's anyone's guess how these factors might intersect and shape the broader economic landscape moving forward. However, one thing is for sure — we are in for an interesting ride.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Adam Jordan is Director of Investments and Chief Compliance Officer at Paul R. Ried Financial Group, an RIA firm based out of Bellevue, Wash., specializing in serving individual retirees. Adam joined the firm in 2002. His responsibilities include designing the overall asset allocation strategies, conducting in-depth market analysis, investment manager due diligence, as well as carrying out the firm’s compliance responsibilities. Adam is also the author of the firm’s client-focused market commentaries.
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Alphabet Stock Falls as Q2 Ad Revenue Growth Slows
Alphabet stock is trading lower Wednesday as slowing ad sales growth offsets a Q2 earnings beat. Here's what you need to know.
By Joey Solitro Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published
-
RSUs: In Divorce, They're Easy to Hide (or Misunderstand)
You may have never heard of restricted stock units, but they can be worth big money. You can't afford to overlook them when negotiating a divorce settlement.
By Stacy Francis, CFP®, CDFA®, CES™ Published
-
How to Live Like You’ve Won the Lottery
Just because you haven’t won a jackpot doesn’t mean you can’t fulfill your dreams of doing what’s important to you with who is important to you.
By Frank J. Legan Published
-
Want to Move to France? What to Consider Financially
Before you start packing, you might want to check out the potential impacts on your taxes, investments, retirement planning and estate planning.
By Alex Ingrim, Chartered MCSI Published
-
Why Would You Need Cyber Insurance?
First, what is it? And is it really necessary? Here are some instances where you might wish you had a cyber insurance policy.
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published