Homeowners

Nearly Half of Homeowners Need Mortgage Rates Below 5% to Consider Moving

Even as the number of homes for sale is on the rise, there are still plenty of homeowners who are happy to remain in their current home—with their low mortgage rates.

A new survey shows that people who bought or refinanced in the last few years when rates were at historic lows aren’t likely to sell unless interest rates drop significantly.

Almost half of those surveyed, 47%, need mortgage rates to drop below 5% to feel comfortable buying a home, according to a Bankrate survey. Even more, 38% want rates to fall below 4%. Bankrate surveyed nearly 2,300 adults in June, about half of whom were homeowners.

The study found that only 5% of homeowners would be comfortable selling their homes at 6% or higher rates. Meanwhile, 42% said no mortgage rate would make them comfortable selling their homes this year.

The mortgage rate lock-in effect

During the pandemic, super-low mortgage rates that dropped into the mid-2% range made buying a home very attractive. With current rates more than twice what they were in 2021, many homeowners don't want to trade in their low-interest mortgages for new loans with higher rates.

This is called the "mortgage lock-in effect," making it hard for people to move or for new buyers to find homes.

The reason behind this effect is simple: higher interest rates bring higher monthly payments and increased long-term costs. So, homeowners are staying put. This means fewer homes are going up for sale.

This decrease in housing inventory causes higher home prices and a big slowdown in transactions.

Adjusting expectations: A new normal

Even though mortgage rates have recently come down, the super-low mortgage rates from the pandemic aren't likely to return soon.

"The surge in mortgage rates since the beginning of 2022 has robbed buyers of one-third of their buying power," said Greg McBride, Bankrate's chief financial analyst. "We're not going back to 3% mortgage rates, and we're not going back to 2021 home prices."

"Figure out what price home you can afford at today's mortgage rates and put a fence around your home shopping based on that reality—not where you hope rates, prices, or future income will be," he said.

Smart tips for homebuyers

Home prices are rising because there aren't enough homes for sale. If mortgage rates drop even a little, more buyers are expected to jump in. This could push prices up even higher and bring back bidding wars.

Raymond Williams, executive vice president of Consumer Direct at New American Funding, recommends buyers "date the rate, but marry the house."

Williams also pointed out that most people don't take out a 30-year mortgage and pay it off in 30 years. They either pay it off sooner, move, or buy more houses in their lifetimes.

Many also refinance their loans when rates go down.

"If you're waiting for a number to go out and buy your house for you and your family, then that means everybody must be waiting for that number, which means a heck of a lot more competition when that number arrives," said Williams.