Blog
Have you recently considered selling your existing home and purchasing a new one? If so, you might already be familiar with what the industry calls the lock-in effect or the mortgage lock-in gap.
If you aren’t familiar with these real estate buzzwords, read on as we explain what they are, how they affect you, how Texas compares with the rest of the country and other states, and how purchasing a new-build home can help unlock the lock-in effect.
The Mortgage Rate Lock-in Effect
Here’s a short explanation of the lock-in effect. Homeowners who want to sell their current home and purchase another may have a historically low mortgage of 3%, 4%, or 5%. Today’s mortgage market is hovering in the 7% range, requiring a higher payment. The difference between the two rates is the “lock-in gap.”
Because of the higher costs, homeowners often choose to stay in their current home with its lower interest rate and payments, even if it is inadequate for their current needs. If they purchased a new home – even a smaller home – their costs would sharply increase. The inability to move for financial reasons renders the housing market frozen.
Impact on the Real Estate markets
The lock-in effect has a depressive impact on the real estate market, causing a frozen housing market. First-time homebuyers who would usually trade up from a starter home stay put. Homeowners who want to move to a larger home often find the supply limited and prices high. In short, a housing market freeze makes it even more difficult for those looking for a home to find one.
The lock-in gap has recently eased with interest rates and home prices coming down. Some experts believe this could be the beginning of a trend, but time will tell.
Homebuyer Mobility
The consequences of the lock-in effect for buyers impact every part of family life. An expanding family can’t move to a home with more space. Someone who wants to pursue better job opportunities in another location can’t afford the higher mortgage and has to stay put. Empty nesters who prefer a smaller home find they would pay more for a smaller footprint than they are for their larger home. Those who want to move closer to family must wait until mortgage rates come back down and the market loosens up.
There are cases where people have to move, such as when the only job option is in a different city or after a divorce. In these extreme cases, people move, even though they may sacrifice their lifestyle due to higher housing costs.
As time passes, it becomes harder and harder for people to postpone moving, and some experts believe these necessary moves are beginning to ease the lock-in gap.
Understanding Mortgage Rate Gaps
The mortgage rate gap is the difference between currently available mortgage rates and the average mortgage rate held by homeowners. The current lock-in gap for the United States, the difference between average existing mortgage rates of 4.1% and the new mortgage rate of 7.25%, is 3.15%. However, lock-in gaps can vary significantly by state.
Colorado has one of the highest lock-in gaps in the nation. The combination of lower average existing mortgage rates of 3.8% and higher new mortgage rate averages of 7.25% makes their gap 3.45%. For a $454,000 mortgage, a homebuyer in Colorado would pay $1,020 per month more.
Texas has one of the country’s lowest lock-in gaps. Existing average mortgage rates are 4.3%, and new mortgage rates are around 6.85%, for a gap of 2.55%. For a $336,000 mortgage, the difference in the old and new mortgage rates would mean an increase of only $340 per month.
Note these numbers are accurate as of December 2024 and are subject to change with time.
Is the Lock-in Effect Fading?
Some experts believe that the lock-in effect is beginning to wane. They theorize that people can only hold off so long, and then they have to move for a new job, the declining health of a family member, or maybe a new set of twins. Certain life circumstances can force a move, no matter the financial consequences.
Soften the Lock-in Effect with a New Build
Even though buyers can’t match an existing 3% mortgage rate today, they might be more likely to move up, downsize, or relocate if they buy their next home in a new home community. Why? Because home builders offer incentives that aren’t available when purchasing an existing home.
Reasons Home Builders Offer Incentives
Home builders often find it advantageous for business to offer incentives to home buyers. Their circumstances can significantly benefit you because of reduced costs to purchase a new-build home.
- Free up capital – Home builders have to be able to move on to the next project, so they might offer an incentive to sell existing inventory.
- Reduce carrying costs – Carrying costs are the expenses the builder must pay to hold property – property taxes, mortgage costs, insurance, utilities, and maintenance are a few.
- Maintain cash flow – Like everyone else, a builder needs to keep enough cash to cover operating costs and invest in new projects.
- Overall economic conditions – High interest rates or an economic downturn might stimulate builder incentives.
- Generate interest and urgency – If sales are sluggish or the builder needs cash for another project, incentives are a good way to increase sales.
Commonly Offered Builder Incentives
Here are some popular incentives offered by builders in planned communities:
- Price reductions on move-in ready homes – When a home is already built, the builder pays carrying costs monthly. If you purchase it, the builder frees up operating expenses and capital. Builders with completed homes in inventory at new home communities may be motivated to offer attractive incentives.
- Cash towards closing costs – In this case, the builder assumes a portion of the closing costs, reducing the amount you, as the buyer, need to pay.
- Rate buydowns – With a rate buydown, the builder offers discount points at closing, reducing the interest rate for the entire loan term, or a specific period.
- Free upgrades and extra features – A builder may offer luxury appointments, appliance upgrades, or other perks to sweeten your new home deal.
Explore your options for buying a home in Texas at a Hillwood Community
Take advantage of the low lock-in Gap in Texas and explore moving to Hillwood Communities. Move-in ready homes are available, and many builders are offering incentives. Hillwood has many active communities throughout Texas in DFW, greater Houston, and just outside Austin. These master-planned communities feature new home designs and resort-style amenities that foster well-being and bring people together. Choose a lot you love in a great place to come home to.
Hillwood is also designing future communities for Texans. If you’ve felt stuck in the housing market freeze, thaw it out with Hillwood Communities in a home that will allow you to live your very best life. Moving to a beautiful new home is possible. Reach out to us to explore our existing and future planned communities.
