Iowa’s large ‘lock-in gap’ causing homeowners to think twice about moving

DES MOINES — Some homeowners who bought houses in 2020 and 2021 when mortgage rates were low are hesitant to sell or buy in the current market with today’s higher interest rates, housing market experts say.

The difference between those low rates during the pandemic and today’s rates is called the “lock-in gap” because homeowners feel locked into their current mortgage for fear of facing a higher monthly mortgage payment.

Iowa’s lock-in gap is third-highest in the country, according to U.S. News & World Report, with the average Iowa homeowner looking at a $224 increase on a monthly mortgage payment if they move, according to the report.

“Homeowners in these states (like Iowa) are likely to end up with significantly higher mortgage rates if they decide to sell and re-buy,” the report says.

Using federal housing data, the news magazine calculated the average existing mortgage rate in Iowa is 4 percent, and the average new mortgage rate is 7.375 percent. That creates a lock-in gap of 3.375 points.

That 3.375-point gap, when applied to $223,000 loan, creates the $224 higher monthly mortgage payment.

Realtors: It’s real

Annie Kaestner of Skogman Realty, president of the Cedar Rapids Area Association of Realtors, has seen the lock-in gap up close.

Her oldest daughter, she said, bought a house in 2021 at “a great interest rate.” That daughter is now looking for a larger house but is holding off any purchase because of the higher interest rates.

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“You’ve got a lot of people that are going to stay put for now,” Kaestner said.

Tom Schulte, president of the Iowa Mortgage Association and vice president of mortgage at Community 1st Credit Union in Cedar Rapids, said the lock-in gap has created a reluctance among some homeowners to consider another property.

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“For homebuyers that locked in record low rates a few years ago, there is no doubt a reluctance to sell and buy new,” Schulte said.

Rates on 30-year fixed mortgages averaged 3.72 percent in early January 2020, fell to as low as 2.65 percent in early January 2021, and were still at 3.05 percent in late December 2021, according to historical data published by the Federal Reserve Bank of St. Louis.

Golden handcuffs

There is industry jargon for feeling locked into a low mortgage rate: golden handcuffs.

“They feel like, ‘I’m locked into this and I have to give it up — I have to break the handcuffs,’ ” said Les Sulgrove, with the Iowa Association of Realtors. “There’s that aspect of sellers are probably holding off until there’s a tipping point.”

The most likely such tipping point would be declining mortgage rates — which is happening already.

The national average rate on a 30-year fixed mortgage on Aug. 28 was 6.31 percent, which was down more than a full percentage point from the 7.33 percent average on May 1, according U.S. News & World Report.

Kaestner, the Skogman Realtor, said she would like to see mortgage rates continue to decline — so long as it does not happen too rapidly.

“I would love to see interest rates come down (but) not too quickly. Because if interest rates come down too quickly, you’re going to flood the market with buyers and then the price of homes goes up again,” Kaestner said.

Kaestner and other housing market expert said it’s not just the lock-in gap that is freezing some potential homebuyers. It’s also the increased cost of houses and cost of living, or a lack of available housing in some areas of Iowa.

“Not only are interest rates higher, home prices have gone up significantly as well,” said Schulte, the Community 1st mortgage executive. “You can sell your home for more than you bought it, but you’re only paying more for the next home, too.

“It can be hard to make sense of it from a monthly cash flow perspective, especially when your normal daily expenses are noticeably higher now than they were a few years ago.”

Kaestner said potential homebuyers who are uneasy about selling their home with its low mortgage rate to buy one with a potentially higher mortgage interest rate should talk to real estate and lending professionals who they trust.

“If you have people that you trust,” she said, “if you have Realtors that you trust that you’re working with, if you have a mortgage lender that you’re working with that you trust and they understand what your goals are, your aspirations, they’re not going to put you in a situation that isn’t good for you.”

Comments: (515) 355-1300, erin.murphy@thegazette.com