You may have heard the phrase locking rate mortgage recently.
As a quick refresher it is the unwillingness of a homeowner to give up a very low mortgage rate in exchange for a much higher one.
Or simply not being able to part with their lower price, because qualifying to buy a home at today’s much higher rates would be impossible.
Regardless, there’s now a value assigned to what’s called the mortgage rate lock effect, with Freddie Mac putting the average at around $55,000.
This means that the current homeowner needs to have a great incentive to sell, unless they want to part with that value.
What is the value of your low mortgage rate?
Freddie Mac reports that six out of 10 borrowers now have a mortgage rate at or below 4%.
And that the effect of the lock-up on the mortgage rate is a benefit to homeowners with fixed-rate mortgages.
Now everyone knows that a low mortgage rate can save you money, thanks to a lower monthly payment.
But they also carry value, which can ebb and flow based on prevailing market prices. This has never been more true than last year and has changed.
Simply put, mortgage rates have more than doubled from their record low levels in 2021.
As a result, those who had kept rates low at the time now had something of great value.
For perspective, the 30-year fixed price hit an all-time low of 2.65% in early January 2021, according to Freddie Mac.
Last week, it averaged a much higher 6.78%, which is over 150%.
Aside from creating a world of haves and have-nots, it has also made transitioning more difficult for those who need a mortgage to buy a home.
Even if you could qualify for a much higher interest rate, would you want to give up your lower rate?
It’s not as if home prices have fallen so you simply trade in your old lower fixed rate mortgage for a new, much more expensive one.
But how much will you lose if you do? Well, now we might know.
Determine the value of the mortgage rate insurance
Thanks to some hard math, that value has now been determined by economists at Freddie Mac.
They determine the value of the mortgage price lock by taking the difference between the outstanding balance of the mortgage and the current value of the mortgage at the prevailing market interest rates.
In their example, the “lucky homeowner” gets a chance to refinance their mortgage at 2.65% in January 2021.
Their $250,000 loan amount would be reduced to about $236,379 after 29 months, with a ridiculously low principal and interest payment of $1,007.
Now suppose they wanted to sell and move somewhere else today, they would look for a similar mortgage rate closer to 7%.
Assuming a similar loan amount, your monthly P&I would jump to over $1,500 per month.
This hypothetical example puts the mortgage price lock value at $86,136.
In other words, they would need a reason close to $90,000 to move, whether it be for a better job, lifestyle, etc.
Otherwise, they would need to stay where they are, which seems to be the most common outcome at the moment given the scarcity of the current housing stock.
The value of your mortgage rate lock may vary
Freddie Mac economists note that the average value of a mortgage rate insurance “varies greatly” thanks to the region and year of construction.
For example, it’s only $32,000 in West Virginia, but works out to $91,000 in Hawaii.
And those who took out mortgages in 2020 and 2021 had an average mortgage insurance value of $77,000 and $85,000, respectively.
Perhaps even more surprising is that even those who took out a mortgage in 2023 have an average mortgage insurance value of $10,000.
Overall, homeowners with fixed-rate mortgages funded by Freddie Mac (30- and 15-year fixed-rate loans) have booked $700 billion in total value.
That total equals about 25% of the unpaid principal balance of Freddie Mac’s mortgage portfolio.
It tells you why this phenomenon is so influential, and why there is such a huge shortage of inventory available for sale right now.
While this would dampen home sales and mortgage facilities, it should help support home prices at a time when affordability has rarely been worse.
Freddie Mac said the company’s official forecast for the next 12 months will lead to house prices falling 2.9%, followed by another annual decline of 1.3%.
But given current market conditions (and an early read of their data), they expect an upward revision.
In short, they expect continued tight inventory due in large part to this lock-in effect, which should keep sales volume down but prices up.
Read more: Will mortgage rates drop for the rest of 2023?
