The Mortgage Rate Trap: 5 Ways Older Homeowners Can Break Free
High borrowing costs are freezing mobility for aging homeowners with low mortgage rates. Here’s how to access your home equity without wiping out your savings.
The sharp spike in mortgage rates may hobble older homeowners who plan to use their homes as a key source of retirement cash. With the average 30-year fixed-rate mortgage climbing above 7%, the so-called "golden handcuffs" of low rates are keeping many retirees trapped in homes they'd otherwise leave, says Robert Laura, founder of the Retirement Coaches Association. Trading a super-low rate for a higher one can easily wipe out the savings of downsizing.
Since housing wealth in primary residences is the largest asset held by U.S. households, according to the Federal Reserve, figuring out the right way to extract housing wealth is a key personal finance challenge for aging Americans.
The golden handcuffs are also forcing pre-retirees who plan to sell their existing home in the next one to five years to weigh closing a deal now, versus waiting until borrowing costs fall, or nixing the sale and aging in place instead.
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"It's paralyzing," says Laura. It's also freezing retirees' mobility.
Where are mortgage rates heading?
Simply hoping for lower rates isn't really a strategy. Why? Mortgage rates aren't expected to come down anytime soon, with sticky inflation, elevated oil prices, and ballooning U.S. government deficits. The 30-year fixed-rate mortgage is expected to hover close to 7% through 2028, according to the Mortgage Bankers Association (MBA). The MBA's latest forecast has the benchmark mortgage rate averaging 6.7% in 2027 and 2028.
Most economists and consulting firms agree with this "higher for longer" outlook. "We're not calling for any rate relief anytime in the near term," said Alex Thomas, research manager, macro, at John Burns Research & Consulting.
"We're forecasting rates to stay about where they are now for the next several years." — Alex Thomas
Rising rates are hurting affordability and are a big reason why home prices in many areas are falling. The median sale price of an existing home was $429,100 in August, down 3.1% from $442,800 in June, according to the National Association of Realtors (NAR).
Higher borrowing costs could crimp selling prices at a time when retirees are looking to sell their homes and downsize.
So what should a retiree or pre-retiree do to monetize their home? Get creative, Laura advised. Multiple strategies can help nullify or offset the worst impacts of the rising-rate environment. A retiree's financial profile should dictate how to proceed. Someone who owns their home free and clear and can downsize to a home they can pay for in cash is less impacted by higher rates. In contrast, an older homeowner who sells their current home and needs to take out a new, likely more expensive mortgage to buy a new home could face a financial squeeze.
Older homeowners with no mortgage less impacted by rate spike
If you have enough equity in your home and can buy your downsized home in cash, today's higher mortgage rates are unlikely to interfere with your quest to downsize or relocate to a place with lower housing costs, experts say. The only catch is if rates keep climbing and affordability becomes so tight that buyers dry up. One way to overcome that obstacle is to accept a slightly lower price to expand the pool of potential buyers who can afford it.
If you're like most homeowners, you likely have sizable equity in your home, which can make selling at a tad lower price easier to swallow financially and emotionally. The average homeowner with a mortgage now has $310,000 in equity (meaning the house is worth $310,000 more than what’s owed on it), according to the September Home Equity Insights Report from Cotality. Buyers who purchased in 2020 hold roughly $86,000 more equity than buyers who purchased in 2023, according to Cotality.
"A high share of baby boomers actually own their homes free and clear," says Selma Hepp, chief economist at Cotality. Nearly 71% of Americans aged 65 to 74 who own homes are mortgage-free, according to the Federal Reserve.
When it comes to moving or downsizing, Hepp says the decision goes beyond interest rates. "It's more about: Do I need to move right away? What is the potential savings or non-savings from relocating? Timing the mortgage market is a very tricky proposition."
If you're a homeowner sitting on hundreds of thousands of dollars in home equity, getting "10 or 20 grand less (on the sale of your home) isn't really going to matter all that much," says Jeff Ostrowski, housing market analyst at Bankrate. If you fit into this category, you'll likely have a good chance of buying a new home with cash and having money left over to supplement your retirement nest egg.
Retirees with lots of equity in their homes also have the advantage of not having to sell. They can simply wait a few years for high rates to dissipate and market forces to become more favorable, experts say.
How older homeowners can navigate the spike in mortgage rates
It's a different ballgame for older homeowners who can't buy a downsized home in cash and must take out a mortgage at twice their current home loan rate. Here are some strategies to consider if you want to downsize despite the higher rate hurdle.
1. Roll future interest costs into sale price
If you'll need a mortgage on your new home, add the extra interest costs you'll incur over the next two to three years to your existing home's sale price. "Bake the extra costs into your asking price," says Laura. If you live in a seller’s market because of a housing shortage or high demand, you can increase your home's price by an amount that will cover higher future interest costs for several years.
Let's say the new home mortgage will cost you $500 more per month. If you were thinking of an asking price of $400,000 for your home, you could list the home for $412,000 instead. If you get your price, you could use the extra $12,000 to cover two years of higher mortgage payments, buying time until you can refinance at a lower rate, says Laura.
Laura says older homeowners nearing retirement who try to time the mortgage market and wait for lower rates face another risk: they could have trouble getting approved for a mortgage if they retire and no longer have a paycheck. "If you need to qualify for a mortgage, you want to apply while you're still working,” says Laura.
Let's run the numbers. A year from now, the 30-year fixed-rate mortgage will be 7.43%, predicts LongForecast.com. So, for a median-priced home of $429,100 with 20% down, the monthly payment a year from now would be $2,381, or $97 more than at today’s 7% rate. Long Forecast, however, expects the 30-year fixed-mortgage rate to fall to 6.88% in September 2028 and down to 5.35% in September 2029. At 5.35%, the monthly payment would be just $1,917, or $367 less than at 7%. Of course, these are predictions. No one really knows for sure where mortgage rates will be in the future.
2. Sell in a seller's market and buy in a buyer's market
Just like opportunistic selling in the stock market can be profitable, so too can selling in a hot market and buying into a cooler housing market, says Ostrowski.
"If you're getting close to retirement and maybe want to move to (a less-expensive) state, it definitely would be smart to start thinking about selling now," says Ostrowski. "But it depends on what part of the country you live in." He notes that housing markets in parts of the Northeast and Midwest are still strong, whereas prices are weaker in places like Florida and Texas, giving you some (price) leverage when shopping for a home. "It's a pretty favorable trade because you're moving from a seller's market to a buyer's market," says Ostrowski.
For older homeowners who expect to keep working for, say, three more years but plan to move in retirement, it could make financial sense to sell into a strong housing market now and rent for a few years. That way, you can cash in on the hot seller's market and hopefully buy into a different, less-pricey market in another state in a few years, when rates are hopefully lower. "That (could be) a really good tradeoff, but it's an individual decision," says Ostrowski.
3. Buy new construction homes with incentives
Homebuilders in many parts of the country that overbuilt are now looking to reduce inventory. "In some of these home communities, builders are offering pretty substantial incentives," says Thomas. Many builders are "covering closing costs, offering design credits, and probably most significantly, interest rate buydowns. They’ll buy down your mortgage rate so that it is significantly below market rates. And that can really make a difference in terms of your monthly payment."
4. Age in place if your house is suitable
Another option is to retrofit your existing home and stay in it for the long haul or at least until interest rates fall enough to make the downsizing math work in your favor. Under this scenario, you can still benefit from your existing low mortgage rate. You can also borrow against your home via a home equity line of credit (HELOC) — albeit at a higher rate — to renovate your home. While the HELOC rate will likely be higher than your current mortgage, you won’t be forced to finance a new home at an interest rate that is double what you currently have.
There's one big caveat to aging in place. If your current home isn't age-friendly now or will be hard to make safe as you age, Laura says you're likely better off selling and moving on. (Here's how to know if your home is ready to age in place.)
"Spending a bunch of money on a three-story condo (with stairs) is a lot more difficult than renovating a one-story ranch or being able to create a main floor master bedroom," said Laura.
If you stay put and have an adjustable-rate mortgage that might reset at a higher rate, you should consider refinancing into a fixed-rate mortgage. That move will lock in a payment that won’t change or spike substantially in the future and hurt cash flow.
What you don't want to do is spend so much on a renovation that it puts you in a worse financial situation than when you started, warns Thomas. "You don’t want to get into a scenario where you spend $100,000 on a bathroom remodel and home prices go down and you don't get your money back on it," says Thomas. "You have to run the numbers carefully. Not every renovation pays for itself."
5. Be careful what you wish for
Those waiting for lower rates risk getting what they asked for, but at a cost, warns Thomas. If rates come down a lot, it will likely be due to a weak economy and subsequent job losses, which may make it harder for pre-retirees or retirees to sell their homes and downsize.
"You have to think about what the situation would be if you did see a significant reduction in mortgage rates," says Thomas. He notes that rock-bottom mortgage rates became available in the past two major economic downturns in the U.S.: the great financial crisis in 2008-09 and during the COVID-19 pandemic in 2020-21. "If rates come down to a point where you're getting a meaningful impact to affordability, it's likely the economy is not in a great place. And that impacts (the ability to) sell your house as well."
The bottom line: "I think just going forward with the assumption that we're in this higher-for-longer rate environment is probably the best route to take," says Thomas.
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