The U.S. Housing Market Faces a Mortgage Rate Lock-In Gap, With Some States Hit Harder Than Others

by iBroker Listings

With mortgage rates rising, the U.S. housing market is experiencing a “mortgage rate lock-in effect,” where homeowners hesitate to sell their homes since they would have to replace their low-interest loans with higher-rate ones. A new report by U.S. News & World Report highlights that this effect is more severe in some states due to varying "lock-in gaps," influenced by local real estate laws and lender availability.

Key findings include:

Current average mortgage rate: 4.1%
New mortgage rate (July 2): 7.25%
National "lock-in gap": 3.15 percentage points
National average loan amount: $357,000
Monthly payment difference: $618 more at 7.25%

Homeowners in states with larger lock-in gaps face even higher costs.

States with the Largest Mortgage 'Lock-In Gaps'

Colorado has the largest mortgage rate lock-in gap in the U.S. According to U.S. News & World Report:

Existing mortgage rate: 3.8% (lowest in the nation)
New mortgage rate (as of July 2): 7.25%
Rate difference: 3.45 percentage points

For an average loan amount of $454,000, monthly payments would increase from $2,077 at 3.8% to $3,097 at 7.25%, a $1,020 increase (49.1%).

Colorado

Following Colorado, the states with the largest mortgage lock-in gaps are Utah (3.445 percentage points), Iowa (3.375), Minnesota (3.35), North Dakota (3.35), Oregon (3.35), South Dakota (3.35), and Washington (3.35).

States with the smallest rate of lock-in gaps

Homeowners in states where rate lock-in gaps are narrow will experience less of a cost increase if they sell their homes and buy at current mortgage rates.

Texas leads with the narrowest mortgage rate lock-in gap nationwide. Here’s how it breaks down:

Texan homeowners currently hold mortgages with rates averaging 4.3%, one of the highest in the country. As of July 2, current mortgage rates offered in Texas average 6.85%, the lowest among all states. This results in a spread of 2.55 percentage points between rates for new and existing mortgages. For an average loan amount of $336,000 in Texas, the monthly payment at 4.3% would be $1,862. At 6.85%, this increases to $2,202, a difference of $340 per month. Following Texas with similarly narrow lock-in gaps are New York (2.575 percentage points), New Mexico (2.575), Michigan (2.675), and Rhode Island (2.775).

Current mortgage rates offered in Texas (as of July 2) average 6.85%, the lowest of any state. (Brandon Bell/Getty Images)

How much more would repeat homebuyers shell out each month?

In states with high housing costs, homeowners could face over $1,000 extra per month in mortgage payments if they were to sell and buy under current mortgage rates.

The study revealed significant increases for homeowners in various states:

Hawaii residents would experience the steepest rise, averaging $1,591 more each month.
California homeowners would see an increase of around $1,470 monthly.
Other states facing substantial payment hikes include:
- District of Columbia: $1,193
- Utah: $1,083
- Washington: $1,058
- Colorado: $1,020

Proceed with caution
Real estate investor Doug Greene from Signature Properties in Philadelphia notes, “Higher interest rates are noticeably impacting our ability to sell projects. Buyers are hesitant due to the substantial rise in rates and monthly payments.”

While these figures can be daunting, there is optimism for homebuyers who already own property and have accrued equity.

“Depending on their home purchase timing, homeowners may have considerable equity,” says Rose Krieger, senior home loan specialist at Churchill Mortgage in Spokane Valley, WA. “This can mean a larger down payment to offset higher rates and prices.”

With a down payment of 20% or more, homeowners can also avoid mortgage insurance on a conventional loan, further reducing their potential monthly payments.

According to Shmuel Shayowitz, president and chief lending officer of private mortgage banker Approved Funding, there's no universal solution. Therefore, seeking guidance from a mortgage and financial advisor to analyze the details is advisable before deciding to sell or remain in your current home.