Locked-in homeowners continue to pay off below-4% mortgages, but their share is shrinking. This phenomenon, which disrupted the housing market, is gradually unwinding. According to the Federal Housing Finance Agency (FHFA), the percentage of below-3% mortgages outstanding declined to 20.0% in Q3, the lowest since Q1 2021, down from 24.6% in Q1 2022. This drop is attributed to homeowners refinancing their homes to secure these ultra-low interest rates during the Fed's asset purchases and 0% policy rates from 2020 to Q1 2022. The share of 3% to 3.99% mortgages also decreased to 31.5%, the smallest since Q3 and Q2 2019, and the lowest since Q2 2016. All types of mortgages, including 30-year fixed-rate, 15-year fixed-rate, and adjustable-rate mortgages, are included in these figures. The combined share of below 4%-mortgages dropped to 51.5%, the lowest since Q4 2020, as homeowners reluctantly sell their homes, letting go of these ultra-low interest-rate mortgages due to life changes. At the peak in Q1 2022, over 65% of all mortgages had interest rates below 4%. The share of adjustable-rate mortgages has been low since 2021, dipping to 4.0% in Q3, down from over 10% in 2013. Some ARMs had rates below 3% before 2020, contributing to the below 3% mortgages being between 2.5% and 4% before 2020. Homeowners with ARMs originated when rates were low experienced payment shock as rates rose in 2022, but this phase has mostly passed. The share of 4.0% to 4.99% mortgages declined to 17.1%, the lowest in the FHFA's data, down from 40% in 2019. When mortgage rates plunged in 2020, many homeowners refinanced, but not all could get below-4% mortgages. Homeowners with 6% or 7% mortgages before 2020 refinanced into the 4% to 5% range. The share of 5.0% to 5.99% mortgages remained stable in 2023-2025, near 10%. Fixed-rate mortgages in this range are available, but 15-year mortgages are not popular. The share of 6%-plus mortgages rose to 21.2% in Q3, the highest since Q3 2015, from 7.3% in Q2 2022. This 'lock-in effect' has impacted real-estate, mortgage brokers, and lenders, causing mass layoffs and voluntary departures since 2021. However, life changes like new jobs, divorce, and family additions lead to some 'locked-in' homeowners selling their homes and paying off these mortgages, gradually unlocking the housing market.
