The Mortgage Lock-In Effect: Why Millions of Homeowners Can't Afford to Sell

What Is the Mortgage Lock-In Effect?

The mortgage lock-in effect refers to the financial disincentive homeowners face when considering a sale because their current mortgage rate is significantly lower than today's market rates. When you locked in a 2.75% or 3.25% rate during the pandemic refinancing boom of 2020-2021, moving means forfeiting that rate and taking on a new mortgage at nearly double the cost. The result: millions of Americans feel trapped by their own good fortune.

This is not a theoretical concept. The Federal Housing Finance Agency (FHFA) published a landmark study quantifying the effect. Their research found that for every percentage point that current market mortgage rates exceed a homeowner's existing rate, the probability of that homeowner selling drops by 18.1%. That single statistic explains why the U.S. housing market has been frozen in place since 2022.

Consider the scope: as of mid-2025, roughly 80% of mortgage holders had rates below 6%, and over 20% still held rates below 3%, according to a Redfin analysis of FHFA National Mortgage Database data. When the average 30-year fixed rate peaked near 7.8% in October 2023, the gap between locked-in rates and market rates created an unprecedented financial barrier to mobility.

The term "golden handcuffs mortgage" captures the psychological dimension perfectly. Homeowners with pandemic-era rates have what amounts to a financial asset worth tens of thousands of dollars embedded in their home loan. Wharton professor Lu Liu estimates the average locked-in borrower holds roughly $50,000 in value from their below-market rate when you factor in total expected future mortgage payments. Giving that up feels irrational, even when life circumstances demand a change.

How the Lock-In Effect Differs From Past Housing Freezes

The mortgage lock-in effect is not entirely new. In the early 1980s, homeowners faced a similar dilemma when 30-year rates spiked from roughly 10% to nearly 18% in just three years. But the current episode is uniquely severe for several reasons.

First, the sheer volume of borrowers affected is unprecedented. During 2020-2021, both homebuyers and existing homeowners flooded the market to lock in historic lows. The Federal Reserve's emergency rate cuts pushed 30-year fixed rates below 3% for the first time ever, and nearly 14 million borrowers refinanced in 2021 alone, according to Freddie Mac data. When rates then surged past 7% in 2022-2023, the rate gap between existing and new mortgages became the widest in modern history.

Second, today's housing market lacks the inventory release valves of past cycles. New construction has been underbuilt relative to demand for over a decade. When the lock-in effect removes existing homes from the market, there is no substitute supply to fill the gap, which pushes prices higher and compounds the affordability problem.

The Math Behind the Golden Handcuffs Mortgage

Understanding why homeowners can't afford to sell starts with the raw numbers. The mortgage lock-in effect is fundamentally a math problem, and the math is brutal.

According to FHFA data, the average locked-in borrower held a rate about 2.54 percentage points below the prevailing market rate as of Q2 2024. If that borrower were to sell and re-mortgage at current rates, their average monthly principal and interest payment would increase by approximately 31.2%. For many households, that translates to hundreds or even thousands of additional dollars per month.

Monthly Payment Comparison: What Selling Actually Costs

The table below shows what happens to monthly principal and interest payments when a homeowner with a pandemic-era rate sells and buys a comparable home at today's rates. These calculations assume a 30-year fixed loan and exclude taxes, insurance, and PMI.

Loan Amount	Payment at 3.0%	Payment at 6.0%	Monthly Increase	Annual Increase
$250,000	$1,054	$1,499	+$445	+$5,340
$350,000	$1,476	$2,098	+$622	+$7,464
$450,000	$1,897	$2,698	+$801	+$9,612
$550,000	$2,319	$3,297	+$978	+$11,736
$700,000	$2,951	$4,197	+$1,246	+$14,952

The FHFA study found that California metros are among the most locked-in markets in the country. San Jose, San Francisco, and San Diego all have average rate deltas exceeding -2.9 percentage points, meaning the average borrower in those markets holds a rate nearly 3 full points below what they could get today. These are also markets with high home values, which magnifies the dollar impact of every basis point.

The Lifetime Cost of Giving Up a Low Rate

The true financial impact extends far beyond monthly payments. Research by Wharton's Julia Fonseca and Lu Liu calculated that the value of a locked-in below-market rate for the average borrower amounts to approximately $50,000 in total expected future savings on mortgage payments, after accounting for the possibility of future refinancing if rates decline. For borrowers in high-cost markets with larger mortgages, this figure can exceed $100,000.

These numbers represent the real opportunity cost of selling. When homeowners say they can't afford to move because they'll lose their mortgage rate, the math validates their concern. A 2025 Bankrate survey found that 54% of U.S. homeowners would not feel comfortable selling at any mortgage rate, and 41% of homeowners paying less than 3% said they would never consider buying again at any rate.

Who Is Most Trapped by Low Mortgage Rates?

The mortgage lock-in effect does not impact all homeowners equally. The FHFA research identified clear patterns in which borrowers and which geographic markets feel the golden handcuffs most tightly.

Geographic Hotspots: Where the Lock-In Effect Hits Hardest

California dominates the list of most locked-in markets. According to FHFA data through Q2 2024, the five metros with the highest lock-in exposure are all in California, led by San Jose-Sunnyvale-Santa Clara with an average rate delta of -3.01. These markets saw heavy refinancing activity during 2020-2021 and relatively fewer new purchases since rates rose, leaving a higher concentration of ultra-low-rate mortgages.

Beyond California, high-cost metros like New York-Newark-Jersey City, Washington D.C., and Phoenix-Mesa-Chandler rank among the markets with the most total lost sales. The New York metro area alone lost an estimated 67,160 sales between Q2 2022 and Q2 2024, followed by Los Angeles with 63,440 lost sales. The lock-in effect has essentially removed entire neighborhoods worth of housing inventory from the market in these regions.

Affluent Homeowners Are More Sensitive to Lock-In

The FHFA study found that wealthier borrowers, particularly those in high-value homes, show higher sensitivity to the lock-in effect. This may seem counterintuitive since affluent households have more resources to absorb higher payments, but the explanation is straightforward. For owners of expensive homes, the dollar impact of each basis point is amplified. A 3-point rate increase on a $1 million mortgage costs far more than the same increase on a $200,000 mortgage.

Additionally, many moves that affluent homeowners typically make, such as downsizing or relocating to a lower-tax jurisdiction, no longer save money when the new mortgage carries a much higher interest rate. The financial incentive to right-size has been neutralized by the rate differential.

The Psychological Cost: More Than Just Money

The lock-in effect extends beyond finances. Homeowners who feel trapped by a low mortgage rate report significant psychological strain. They may be living in homes that are too small for growing families, too large for empty nesters, or too far from new jobs. The FHFA paper explicitly notes that lock-in "restricts mobility, results in people not living in homes they would prefer, inflates prices, and exacerbates economic inequality."

Wharton research highlights the labor market dimension: locked-in homeowners are less likely to relocate for better-paying job opportunities. This creates a drag on economic productivity as workers remain mismatched with available positions, reducing both individual earnings potential and broader economic output.

Is the Lock-In Effect on Mortgages Finally Loosening?

After more than three years of historically constrained housing mobility, there are credible signs that the mortgage lock-in effect is beginning to soften, although it remains a powerful force in the market.

The Rate Distribution Is Shifting

The most important structural change is happening inside the mortgage pool itself. As new loans continue to be originated at higher rates and some low-rate borrowers do sell or refinance, the share of homeowners with ultra-low rates is gradually shrinking. In Q3 2025, the share of outstanding mortgages at 6% or higher climbed to 21.2%, surpassing the share below 3% for the first time. This shift means a growing portion of the homeowner population faces a smaller penalty for moving.

Meanwhile, market rates have been trending lower. As of February 26, 2026, the 30-year fixed-rate mortgage averaged 5.98%, according to Freddie Mac's Primary Mortgage Market Survey. That marks the first time rates have dropped below 6% since September 2022. For homeowners with rates in the 4-5% range, a 5.98% new rate is far less painful than the 7.5% rates they would have faced in late 2023.

Life Events Override Financial Logic

No matter how favorable a mortgage rate might be, life does not stop. Divorce, job relocation, family growth, retirement, health changes, and other major events compel homeowners to sell regardless of rate differentials. As Redfin noted, homeowners are increasingly deciding that their life needs outweigh the financial benefit of clinging to a low rate.

This is reflected in rising inventory levels. Active listings across the U.S. climbed throughout 2024 and 2025, reaching approximately 1.1 million by late 2025, the highest level since 2019 and within 9% of pre-pandemic norms, according to Realtor.com data. More homeowners are choosing to list, especially in Sun Belt and West Coast markets where the inventory recovery has been most pronounced.

What Forecasters Expect

Morgan Stanley strategists project that 30-year fixed rates could dip to the 5.50-5.75% range by mid-2026, which would further erode the lock-in barrier. Fannie Mae's forecast has rates settling near 5.9% by year-end 2026. If these projections hold, the rate gap between locked-in borrowers and new mortgages will continue narrowing, and housing turnover should gradually increase.

However, the lock-in effect is unlikely to disappear entirely. An estimated 52% of mortgage holders still carry rates below 4%, and even at a 5.5% market rate, the financial penalty for those borrowers to move remains substantial. The recovery will be gradual, not sudden.

When Selling Still Makes Sense Despite the Lock-In Effect

The mortgage lock-in effect is real, but it should not be treated as an absolute barrier. There are scenarios where selling your home is the right financial and personal decision, even if it means giving up a pandemic-era rate. A thorough understanding of how rate changes affect your buying power can help clarify whether moving makes sense for your household.

The Equity Offset Strategy

One of the most effective strategies for locked-in homeowners who need to sell is leveraging home equity to reduce the new loan size. Homeowners who purchased before 2022 have generally seen significant appreciation. According to equity calculation methods, the median homeowner who bought in 2020 has gained more than $100,000 in home value.

Consider this example: a homeowner sells a home worth $500,000 with a remaining mortgage balance of $300,000 at 3.0%. After closing costs and agent commissions, they net approximately $165,000. They use that as a down payment on a $475,000 home, financing $310,000 at 6.0%. Their new monthly payment of $1,858 is only $113 more than their old payment of $1,265 on the $300,000 balance. The rate doubled, but the strategic use of equity kept the payment increase manageable.

The Rent-Out Alternative

Some homeowners are choosing to keep their low-rate mortgage by converting their current home into a rental property and buying or renting a new residence. This approach preserves the below-market rate as an income-generating asset. However, it carries its own complexities: landlord responsibilities, tax implications, potential loss of primary residence capital gains exclusion, and the need to qualify for a second mortgage. A clear understanding of rental property ownership is essential before pursuing this path.

Strategies for Homeowners Who Can't Move Because of Their Mortgage

If selling does not make sense right now, there are several practical steps homeowners trapped by a low mortgage rate can take to improve their situation without forfeiting their rate advantage.

1. Renovate Instead of Relocate

If your home no longer meets your needs, a targeted renovation may cost far less than the cumulative penalty of a higher mortgage rate. Adding a bedroom, finishing a basement, or expanding a kitchen can address the functional shortcomings driving the desire to move. A renovation with strong ROI improves your living situation while preserving the financial advantage of your existing rate.

2. Explore Assumable Mortgages

FHA and VA loans are assumable, meaning a buyer can take over the seller's existing loan at the original interest rate, subject to lender approval. If your loan is FHA or VA, this feature makes your home significantly more attractive to buyers and can command a premium price. However, conventional loans backed by Fannie Mae and Freddie Mac are generally not assumable. Wharton's Lu Liu has noted that making more mortgages assumable or portable is one of the most effective policy solutions to the lock-in problem.

3. Consider a Rate Buydown

Temporary or permanent rate buydowns can reduce the sting of a higher rate on a new purchase. In a temporary buydown (such as 2-1 or 3-2-1), the seller or builder subsidizes the buyer's rate for the first few years. Permanent buydowns involve paying discount points upfront to secure a lower fixed rate for the life of the loan. Builders in particular have been offering aggressive buydown incentives to attract locked-in buyers.

4. Watch for a Refinance Window

If you do sell and take on a higher-rate mortgage, you can refinance later when rates decline further. Morgan Stanley forecasts suggest rates could dip to 5.50% by mid-2026. If you purchase now at 6% and refinance in 12-18 months at 5.50%, the long-term cost of the rate gap narrows considerably. The key is ensuring that you can comfortably afford the payments at the initial rate without counting on a refinance that may or may not materialize.

5. Optimize Your Current Financial Position

Use the stability of your low payment to accelerate other financial goals: paying down high-interest debt, building an emergency fund, or investing in retirement accounts. The money you save each month by not paying a 6%+ mortgage rate is an asset. Deploying it wisely means you'll be in a stronger financial position whenever you do decide to move.

How the Lock-In Effect Is Reshaping the Housing Market

The mortgage lock-in effect is not just a personal finance challenge. It has fundamentally altered the structure and function of the U.S. housing market in ways that will take years to fully unwind.

Suppressed Inventory and Inflated Prices

The FHFA estimates that the supply restriction caused by the lock-in effect increased national home prices by 7.0% through Q2 2024, which more than offset the 5.6% price decrease that would have resulted from higher rates alone. In other words, home prices would be meaningfully lower today if locked-in homeowners had listed their properties at normal rates. This artificial scarcity has been particularly harmful to first-time buyers, who compete for a limited pool of available homes and face both elevated prices and elevated borrowing costs simultaneously.

Reduced Labor Mobility

The Fonseca and Liu research, published in the Journal of Finance, found that mortgage lock-in significantly reduces geographic mobility. Locked-in homeowners are less likely to move in response to wage growth in nearby regions, meaning they may be passing up higher-paying opportunities. For the broader economy, this creates mismatches between available workers and open positions, particularly in growing industries that need to attract talent from other regions.

Widening Inequality

The lock-in effect has created a two-tier housing market. On one side are existing homeowners with sub-4% rates, low monthly payments, and substantial equity. On the other side are renters and first-time buyers facing near-record home prices and borrowing costs that are roughly double what locked-in homeowners pay. The FHFA study explicitly notes that lower-wealth borrowers are less able to strategically time their sales, which worsens economic inequality.

This divide also exists within the homeowner class. Those who happen to have purchased or refinanced during the pandemic window are financially advantaged over those who bought in 2022 or later at higher rates. The timing of a mortgage origination, something largely determined by luck and life circumstance, has created massive disparities in housing costs.

Frequently Asked Questions About the Mortgage Lock-In Effect