Image Source: Pexels
 

The problem of “mortgage lock-in” arises when a homeowner has a mortgage that was obtained a few years back at a lower interest rate. If that homeowner wants to move to another place (often by using the equity in their current home for the down-payment), it would be necessary to obtain a new mortgage at a substantially higher interest rate. In this way, a move could lead to a substantial rise in monthly mortgage payments. Of course, when potential sellers are discouraged from selling, the supply of homes available in the market drops–and even the potential buyers who are willing to take out a mortgage at the higher interest will have to search harder or wait longer to find the home they desire.

Kyle Mangum of the Philadelphia Federal Reserve provides some background in an overview article, “How Mortgage Lock-In Affects the Price of Housing,” which is subtitled, “There has never been such a huge gap between the rate homeowners pay and the rate for new mortgages” (Economic Insights, 2025: Q3).

This figure shows interest rates for a 30-year fixed rate mortgage going back to the year 2000, along with the policy interest rate controlled by the Federal Reserve–the “federal funds rate.” As you can see, 30-year mortgages are above 8% back in 2000, and then gradually dropped through the pandemic in 2020-21.
 

At least to me, it’s interesting to note that the first two times the Fed raised interest rates since 2000, the 30-year fixed interest rate went up only a little. But the third and most recent time the Fed raised interest rates has been accompanied by a substantial rise in interest rates for a 30-year fixed rate mortgage. One obvious possible explanation for this greater movement is that when the Fed raised interest rates earlier, inflation had barely budged over time–so lenders were willing to lend at, say, 4% interest with an expectation that inflation would be close to 2%. But after the burst of inflation in 2022, lenders looking at a 30-year time horizon are not willing to assume that inflation will remain at around 2%, and the interest rate has risen accordingly.

The result is that lots of people who took out or refinanced a mortgage from, say, 2010 to 2021 are paying an interest rate well below the going rate for a new mortgage. Mangum offers this interesting figure. From about 2008 up through 2022, relatively few of those who had a mortgage had an interest rate that was more than 1 percent below the rate for a new mortgage. They were not “locked in.” But at present, something like 90% of those with mortgages are paying an interest rate that is at least 1 percentage point below the market rate for a new mortgage, so if they sold their current house and took out a new mortgage as part of buying a different house, their monthly payments could be substantially higher. As Mangum points out, the constricted housing supply from mortgage-holders who feel locked-in helps to explain why US housing markets have in recent years experienced both low sales volumes and high price growth.
 

To put this another way, mortgage-holders have in recent decade been able to take advance of lower interest rates to refinance their fixed-rate mortgages. But with the recent rise in interest rates, now most mortgage-holders are paying an interest rate below the market interest rate for a new mortgage, and so refinancing has dried up. Here’s a figure from Freddie Mac, showing the extent of mortgage refinancing since 1980. In particular, the lower mortgate interest rates in the early 2000s led to a surge of refinancing. But over time, mortgages were being taken out at lower interest rates, and although refinancing tended to surge when mortgage interest rates fell, the total amounts dropped lower than in the early 2000s. Since 2022, when interest rates went up, refinancing of mortgages has fallen to extremely low levels.
 

Is there an answer to the locked-in problem? As Mangum points out, the options within the current framework of US mortgages are limited. If the Federal Reserve reduced its federal funds target rate substantially, it would bring down mortgage interest rates as well, but a return to the days of a federal funds interest rate at nearly zero percent seem unlikely. Also, my guess is that the fear of future inflation will tend to keep 30-year fixed rate mortgages high. If Americans liked adjustable-rate mortgages, then lock-in (and refinancing) would not be such big issues–but Americans as a group have shown a preference for fixed mortgage payments.

What about if US mortgage institutions could change? For example, what if mortgates could be “portable,” so that you keep your earlier mortgage when you move to another home? However, a “portable” mortgage would have a different interest rate than a “nonportable” mortgage–because it might end up applying to different houses and on average might be held for different periods of time–and so trying to just pass a law to make all mortgages portable may not be practical.

Another approach comes from Denmark. The idea is that some of the investors who in the past purchased housing-backed securities that involved low mortgage rates would like to ditch those investments when interest rates go up. In Denmark, it’s possible for a mortgage-holder in this situation to buy back their own mortgage at a significant discount–thus letting the mortgage-holder benefit in this way when interest rates rise. If someone who took out a mortgage at a low interest rate could pay off the mortgage at a discount, they might become more willing to sell–and in this way to make the housing market more flexible.

But setting aside these types of more fundamental reforms, the locked-in problem is more likely just to resolve slowly over time. As Mangum writes:

[T]he unwinding of lock-in will likely come about through normal housing market turnover—that is, through changes in family status, jobs, health, and so on. Thanks to this turnover, most new and existing mortgages will eventually converge to the market rate. But this unwinding will take time to run its course—and extra time because the rate at which people move is dampened by lock-in …

More By This Author:

Do Rules To Limit High Government Debt Work?
Snapshots Of The Global Robot Population
50 Years Ago: When The U.S. Encouraged Coal Use