As the “lock-in effect” continues to hamper home sales across the country amidst an elevated mortgage rate environment, recent research from U.S. News & World Report shows the “lock-in gap” — or the difference between average rates on existing mortgages and new mortgages — varies by state.
Where the gap is narrowest, the cost of replacing a low-rate mortgage with one in the middle or high sixes, say, is lower, and therefore, more stomachable. In states with the widest lock-in gap homeowners may be more reluctant to sell.
According to the Federal Housing Finance Agency (FHFA), the average mortgage rate for all mortgages in the first quarter of 2024 was 4.1%. Myriad reasons explain why rates can vary state to state, affecting the severity of the lock-in effect on home sales in each state.
Higher concentrations of mortgage lenders in some states create competition, for example, which pushes rates down. Different regulatory costs make loan production more expensive in some states than others; those costs are passed to consumers through higher mortgage rates. States where residents have higher incomes and stronger credit profiles tend to have lower mortgage rates because those borrowers translate to lower risk, thus lower borrowing rates.
According to U.S. News’s analysis, with a spread of 345 basis points (bps) between rates on new and existing mortgages, Colorado has the widest lock-in gap in the country, in large part because Colorado homeowners have the lowest existing mortgage rates of any state, at 3.8%. Colorado homeowners could face the highest costs of selling and re-buying at today’s rates.
Utah (344 bps), Iowa (337 bps), and Minnesota, North Dakota, Oregon, South Dakota, and Washington (335 bps) followed Colorado as states with the highest mortgage rate lock-in gaps.
Meanwhile, Texas had the narrowest mortgage rate lock-in gap, at 255 basis points. The average existing mortgage rate for Texans is 4.3%. New York and New Mexico tied for the second-smallest lock-in gaps, with a difference of 257 bps between existing and new mortgage rates, followed by Michigan (267 bps), and Rhode Island (277 bps). A narrower gap means homeowners in these states may face lower cost increases to sell and re-buy at current rates.
