Why so many Americans feel trapped in their homes by their low-rate mortgages

Bob Wood, 66, has been thinking of selling his home in Mobile, Alabama. The finance professor and his wife, Terri, purchased the 5,000-square foot house with a pool nearly a decade ago. “It’s probably time to downsize,” he said. They would also like to be closer to their grandchildren in Tennessee.

And yet, “we are in the 10th year of a 3.125% 15-year fixed mortgage,” he said. They don’t want to move now and give up that low rate to buy at a higher rate.

“We just don’t want to pay that much in interest.”

Wood is among “a stock of people sitting on very cheap mortgages,” said Tomas Philipson, a professor of public policy studies at the University of Chicago and former acting chair of the White House Council of Economic Advisers. 

Those homeowners would need to finance a new home at a higher rate than the rate they currently hold, adding hundreds of dollars a month to their mortgage payment, which has created an incentive to stay where they are. For them, opting not to move is “the right strategy.”

With home prices and interest rates on the rise, “the consumer is best advised to stay put,” Philipson said.

The recent spike in mortgage rates has created a so-called golden handcuff effect. The term is often used to describe financial incentives employers may offer to discourage employees from leaving a company. For homeowners, a low mortgage rate is similar. 

Most homeowners today have mortgages with interest rates below 4% or even below 3%, after moving or refinancing when rates hit record lows during the Covid pandemic.

Nearly 82% of home shoppers said they felt “locked-in” by their existing low-rate mortgage, according to a recent survey by Realtor.com.

Because of that, there is a critical shortage of homes for sale, with year-to-date new listings roughly 20%…