The Wall Street Journal recently ran a story on divorced couples who were sticking together. The reason? Not the dog or even kids. Rather, it's their 2% mortgage." It explored some of the many creative ways in which formerly married couples are continuing to share the marital home.
Why are they doing that? Because they fear the financial pain that getting a 2025 mortgage at 6.5%-7.04% will bring compared with their existing 2020-21 loan at 2.65%-3.18%. Anyone with a rate in the 4% range might feel the same way.
When, about a year ago, the Federal Housing Finance Agency studied this lock-in effect, it reported:
"Findings reveal that each percentage point that market rates exceed existing fixed rates reduces sale probability by 18.1%. This lock-in prevented 1.72 million transactions from 2022 Q2 to 2024 Q2 and increased home prices by 7.0%. Lock-in restricts mobility, results in people not living in homes they would prefer, inflates prices, and exacerbates economic inequality."
Some Sacrifices Former Couples Make
The Journal found that former couples were making enormous compromises and sacrifices to avoid the financial pain of moving on.
In one case, "He lives in a Cape Canaveral, Fla., beach bungalow," reports the Journal. "She lives in a 19-foot Airstream trailer in the yard. Their arrangement preserves the loan, which they refinanced at roughly 2% when rates were at rock-bottom levels in 2020. Now, rates are well above 6%, which, along with high home prices, would almost certainly lift the cost of moving for both of them."
Others "nest." That means that the kids stay put while each parent rotates in and out of the home on an agreed schedule. This can create squabbles over chores, and some have instituted Airbnb-style checklists, laying out what needs to be done before each ex checks out.
In yet other cases, both exes remain in the same home, designating certain rooms as the exclusive domain of one or the other. This can be the most challenging of all options when a divorce has been less than cordial. In some cases, the home is effectively split in two to minimize chance encounters, with each former spouse accessing his or her part of the home through a different exterior door.
What Might It Take to Tempt the Locked-In to Move?
A year ago, Julia Fonseca of Gies College of Business at the University of Illinois and Lu Liu of The Wharton School at the University of Pennsylvania wrote a prize-winning academic paper about the impact of mortgage lock-in. It was heavy on advanced math.
For those who prefer executive summaries to detailed working-outs, Professor Liu provided a Q&A on the Wharton School's website.
"For the median borrower, a 1 percentage point increase in mortgage rates translates into around $2,000 more in annual mortgage payments, which over the term of the mortgage can amount to an additional $35,000 in future payments," Liu said. "Over the most recent years, we find that a 1 percentage point increase in lock-in (measured as the difference between the locked-in rate and current mortgage rate) thus reduces moving by 16%."
The study estimates that the value of a low rate is about $50,000.
We've recently been reporting that 3 million borrowers would today benefit from refinancing to a lower rate, even allowing for closing costs. That could soon rise to 4.8 million if rates drop just a bit more.
But those who could benefit are homeowners who bought or refinanced when mortgage rates were higher than they are now. It could be a long time (maybe never) before those with rates in the 2%-4% range could similarly be in a pain-free refinancing position.
Move Sooner by Taking a Holistic View?
Liu reckons that the average uberlow rate might save borrowers $50,000 over the lifetime of their loan. Presumably, that's $25,000 each for a divorcing couple, assuming a 50-50 split.
Neither sum is easy-come-easy-go money. But borrowers shouldn't put on blinkers when viewing it.
Some are turning down higher-paid jobs and promotions to avoid relocating, says Liu. Yet a decent raise could soon erode the impact of a higher mortgage rate. And stalling a career at a point when someone should be climbing their professional ladder could come with a hefty long-term cost.
Meanwhile, home prices have risen sharply since uberlow rates were around. In March, Cotality (formerly CoreLogic) reported, "The average borrower had $303,000 in home equity at the end of 2024."
Such a sum, invested as a down payment on a different home, could help keep monthly payments on a new mortgage affordable.
Of course, everyone's situation is unique. But it could be worth running the numbers, while considering the costs (financial and emotional) of staying put as well as those associated with moving.
