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How the mortgage rate lock-in effect is impacting the US housing market

By Patrick Ross · Reviewed By Jacob Norris · Last Updated October 2, 2024
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Many mortgage borrowers have fixed-rate mortgage rates that are substantially below current market interest rates. If these homeowners were to sell and take on a new mortgage they would be paying a much higher mortgage interest rate.

Holding a mortgage rate below the current market rates creates a disincentive to sell which is known as a "lock-in" effect. This lock-in effect reduces the supply of homes that enter the market which in turn pushes home prices higher.

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Percentage of mortgages outstanding by mortgage rate

With the current market interest rate of 6.08% for 30-year fixed mortgages approximatly 83.7% of borrowers have a mortgage rate less than the current rate.

Here is a breakdown on the percentage of mortgages outstanding based on original interest contract rates.

  • 25.8% of mortgages have a rate less than 3.00%
  • 33.8% of mortgages have a rate between 3.00% and 3.99%
  • 14.9% of mortgages have a rate between 4.00% and 4.99%
  • 9.3% of mortgages have a rate betweenf 5.00% and 5.99%
  • 16.3% of mortgages have a rate more than 6.00%
Average mortgage rate on outstanding loans in the USA

Percentages of mortgages below 3%

The percentage of mortgages with mortgage rates below 3% has increased substantially over the past four years. Outstanding mortgages with sub 3% rates make up 25.8% of the oustanding mortgages in 2024.

A jump was seen in the percentage of sub 3% seen in total oustanding loans with the share increasing from 4.1% at the start of 2020 to a peak of 33.3% in the first quarter of 2022.

Low interest rates over the past four years have allowed Americans to lock into sub 3% rates pushing the overall percentage of loans with sub 3% rates up.

Percentages of mortgages above 6%

The percentage of mortgage rates above 6% have increased in recent years — with 16.3% of oustanding mortgages at rates above 6%.

This share is up from the low of 3.7% that was seen in the first quarter of 2022 when homebuyers locked into low rates and existing homeowners refinanced at lower rates.

What other reasons are behind the mortgage lock-in effect?

High mortgage rates are the primary factor for the lock-in effect — as outlined in national housing survey by Fannie Mae. with 21% of mortgage borrowing homeowners responding that it is their current low mortgage rate that is the primary reason causing them to stay in their current home longer than anticipated. Other reasons included 19% of mortgage borrowers liking their current home and 13% citing high home prices as the reason.

Historical average interest rate on all mortgages

The average interest rate on all outstanding mortgage rates is 4.1% — which is much lower than the current 30-year fixed mortgage rate.

While the overall average interest rate on all mortgage has been decreasing since the data was tracked in 2013, it reached a low in the last quarter of 2021 through the second quarter of 2022 where the overall average rate was 3.50%. As interest rates have increased in recent years and new homebuyers experience higher mortgage rates the overall average rate has increased where it currently sits at 4.10% in 2024.

  • Highest Average: 5.10% (2013)
  • Lowest Average: 3.50% (2021-2022)
Historical average interest rate on all outstanding mortgages

The overall mortgage rate saw a large dip from 2020 to 2022 when interest rates where at an all time low. Many exisiting homebuyers took advantage of low rates and refinaced their existing mortgages. This paired with new homebuyers purchasing homes at low rates pushed the average interest rate on all outstanding mortgages lower.

Source: FHFA