Homeowners who held onto a 3% mortgage rate are becoming ‘accidental landlords’ (2024)

The era of lower-than-ever mortgage rates is long gone, and it’s been replaced with rates hovering around 7%. But homeowners who locked in lower rates before or during the Pandemic Housing Boom aren’t selling. In fact, some of them are becoming “accidental landlords,” simply because they don’t want to lose their low rates of the past.

That being said, the so-called lock-in effect is putting pressure on both sides of the market. There aren’t as many buyers looking for new digs and not as many sellers looking to move up or downsize, if they’ll get stuck with a mortgage rate more than twice as high as their old one.

Redfin’s chief economist Daryl Fairweather told Fortune that high rates are constricting activity. “They’re looking at their monthly payment, which is quite low if they locked in a 3% mortgage rate compared to what their monthly payment would be if they sold and bought again, which would be quite high given how high mortgage rates are,” Fairweather said. “And it just makes a lot of sense for them to hold on to that low interest rate.”

Although rates are down from their 7.37% peak, the 30-year fixed mortgage rate came in at 6.57% on Monday. According to Goldman Sachs, 99% of borrowers have a mortgage rate lower than 6% (or the current market rate). Of those, 28% locked in rates at or below 3% and 72% locked in rates at or below 4%.

So if you took on a $700,000 mortgage with a 7% rate, your total monthly payment would be $4,657. But with the same size loan at a 4% rate, your monthly payment would be $3,342. Let’s say it’s a 3% rate with the same size loan, your monthly payment would be $2,951. It’s the golden-handcuffs of mortgage rates, and it’s keeping homeowners with low rates from selling and turning some into landlords.

Fairweather said there’s both anecdotal evidence and data showing that homeowners are holding on tight to their low rates. For example, new listings of homes for sale fell 21.7% year-over-year for the four-week period ending March 5, making it the biggest decline in two months, according to Redfin. In the same period, the biggest declines were seen in Sacramento (at -45.6%), Oakland (-44.5%), Portland (-42.3%), San Jose (-42.1%), and Seattle (-41.2%).

Michael Zuber, author of One Rental at a Time and former tech worker turned real estate investor, told Fortune that a 30-year fixed mortgage at a rate of 3% is without question one of the best assets most homeowners will ever have.

“They shouldn’t sell, they should rent it out,” Zuber said, adding that several people on Twitter have told him they’re making around $1,000 a month after expenses from doing exactly that, sarcastically adding that the prospect of that “doesn’t suck.”

As for those who may not want to deal with the hassle that’s sometimes associated with renting out their property or even just being a landlord, Zuber said “if you don't like money, go ahead [and sell].” With his own properties, Zuber said he spent nine months refinancing all his debt to sub-4% around the end of 2020 and beginning of 2021, all fixed for 30 years.

“Inflation is real, but when you have an asset where the debt is fixed, and especially if it’s fixed at 3% and we’re running at inflation of above 3%, you win. It’s like printing money,” Zuber said. “It’s the 30-year fixed rate debt, that’s the magic in this.”

The CEO and founder of wealth and investment website Top Dollar, Josh Dudick, told Fortune that once mortgage rates dropped, around 2020 and 2021, he refinanced his vacation home in the Hamptons at a 30-year fixed rate below 3%. Dudick said he was thinking of selling but decided to rent it out instead because he’d have to pay capital gains on his return and he’d lose that “really low mortgage rate” he locked in. With renting it out, Dudick’s covering his monthly mortgage payments and some, all the while the value of the home (that he originally purchased for more than $1.5 million) has doubled, Dudick said.

“You can no longer lock in that incredible leverage, so at this point, I plan to just hold steady… I still have a really good levered return” Dudick told Fortune, adding that even if rates go down a bit, he’s not planning to sell.

David Highbarger, an agile coach and founder of Reaction Agility, told Fortune that he was thinking of selling his home in Florida but “hated the idea of wasting” his low 3% rate, especially because he was looking at a rate of around 6.5% for his next home. Highbarger bought the home a little over a year ago, but needed to move for personal reasons.

“When I started looking at buying another home I was blown away by the 6.5%…even with [a high credit] score, they still want 6.5%, which kills me,” Highbarger said.

After talking with his neighbors and learning how much they were asking tenants to pay for rent, Highbarger decided to rent it out, which now covers his monthly mortgage payment, insurance, and taxes—making him a small profit each month. Highbarger said it “seems like a better return, a better use of my money, than just owning it,” particularly, as the home appreciates. Highbarger added later that the 3% rate is really what’s enabling him to do this, and he hasn’t had much trouble so far considering there’s “no shortage of people looking for rentals.”

Los Angeles-based real estate agent with Compass, Mackenzie Stone, told Fortune that everyone around her was buying, including her clients, and she had to get in on all the action. Stone bought her home in Los Angeles in the summer of 2021 when rates were lower but expected to climb up. Her offer was one of 30, all over the asking price. She locked in a 30-year fixed rate in the low fours, which Stone says, “is absolutely crazy compared to where they are today.”

Stone purchased the home for more than $1.6 million and expects to eventually sell as its value increases, but she’s “really holding on at this point just because of the low interest rate.” Instead of renting it out long-term, Stone is renting it out through Airbnb and making about three times her monthly mortgage because of the low rate.

With fewer sellers, inventory is tightened and there’s less supply. Zuber told Fortune that in “one market there’s actually three markets,” the luxury market, the move-up market, and the first-time homebuyer market. The luxury market is down, with purchases falling a record 44.6% year-over-year during the three months ending Jan. 31., according to Redfin. The move-up market is “dead, for the most part, because in order to move up you have to sell the first home,” Zuber said. But the first-time homebuyer market is hot because there’s not enough inventory, which is exacerbated by homeowners that have locked in their low rates and are choosing not to sell.

This story was originally featured on Fortune.com

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Homeowners who held onto a 3% mortgage rate are becoming ‘accidental landlords’ (2024)

FAQs

Are homeowners who held onto 3% mortgage rates becoming accidental landlords? ›

Experts say there has been an increase in "accidental landlords" in recent years as homeowners have become reluctant to give up low mortgage rates secured during the pandemic or before. Renting property can be risky and property owners need to be prepared for expenses like repairs.

How many people have a 3% mortgage? ›

More than three-quarters of homeowners — 78.7 percent — have a mortgage rate below 5 percent, while nearly 6 in 10 — 59.4 percent — have a mortgage below 4 percent. Just 22.6 percent have a mortgage rate below 3 percent, according to Redfin.

Is a 3 interest rate good? ›

Contrary to the popular appeal of lower mortgage rates, financial experts, including a former Federal Reserve economist, suggest that a return to the 2 percent to 3 percent rates might indicate severe economic distress.

Why your old mortgage is your most valuable asset? ›

The leap in interest rates of the past two years means that an old fixed-rate loan should be thought of as one of your most valuable assets, rather than a deadweight loss you have to pay the bank every month. Getting one's head around the idea that money you owe to someone else is an asset is hard.

Is America becoming a renter nation? ›

FACT: Since 2005, the number of renter households has grown 10 times faster than owner households. WHY IS THIS A PROBLEM? Two reasons: Becoming a rental nation threatens the ability of many Americans to build wealth.

Should I hold onto property? ›

So my advice is always — when you buy a piece of real estate — is to hold onto it as long as possible. It's not timing the market; it's time in the market, as they say,” Arendsen notes. He also advises homeowners to keep an eye on interest rates and your potential profit.

Is everyone locked in a 3% mortgage except Millennials? ›

"Everyone locked in a 3% mortgage except millennials. Millennials spend significantly more on housing, while boomers spend more on health care and entertainment." Millennials experienced a 20% jump in mortgage debt since the end of 2021, according to BofA.

How many people get a 30-year mortgage? ›

Today, nearly 95 percent of existing U.S. mortgages have fixed interest rates; of those, more than three-quarters are for 30-year terms. No one set out to make the 30-year mortgage the standard.

What is considered a good mortgage rate? ›

In today's market, a good mortgage interest rate can fall in the high-6% range, depending on several factors, such as the type of mortgage, loan term, and individual financial circumstances. To understand what a favorable mortgage rate looks like for you, get quotes from a few different lenders and compare them.

Will mortgage interest rates ever go down to 3%? ›

It's possible that rates will one day go back down to 3%, though if current trends hold that's not likely to happen anytime soon.

Will interest rates drop in 2024? ›

Economists do expect rates to gradually decrease this year, though. Forecasts from both Fannie Mae and the Mortgage Bankers Association predict the average 30-year rate will be at 6.4% by the end of 2024.

Will mortgage rates drop in 2024? ›

Mortgage rates are expected to decline later this year as the U.S. economy weakens, inflation slows and the Federal Reserve cuts interest rates. The 30-year fixed mortgage rate is expected to fall to the mid- to low-6% range through the end of 2024, potentially dipping into high-5% territory by early 2025.

Do most retirees have a mortgage? ›

In 2022, researchers found that just over 40 percent of homeowners older than 64 had a mortgage, a jump from roughly 25 percent a generation ago.

What is the most valuable asset you can never own? ›

And the prime example of such an asset is 'time'. Yes, time is an asset. And no, you can never own it. Thus, time is an asset you can never own.

Why owning a house is not an asset? ›

Since your home is costing you money every single month, it's a liability. As a homeowner, you have to spend money on expenses that you can't avoid, like maintenance fees and property taxes. You also have to deal with any issues that pop up from a leak on the roof to replacing your furnace.

What happens to my mortgage if the housing market crashes? ›

Increased risk of foreclosure

A housing market crash often contributes to an increase in foreclosure activity. Homeowners who experience financial hardships may struggle to make mortgage payments, leading to foreclosure.

What happens to mortgage rates when housing market crashes? ›

In general, interest rates are likely to rise if the housing market crashes. This is because when the housing market goes down, it's often a sign that the overall economy is doing poorly too. And when the economy does poorly, investors typically look for safer investments like government bonds and mortgages.

What happens to mortgages during a housing crash? ›

Recessions and housing market crashes may cause your house's value to decrease. However, your set mortgage rates won't lower, meaning your monthly payments will be higher than your home's worth. While many may dip into their savings to help pay the steep bills, others may need outside assistance.

Will mortgage ever go down to 3? ›

It's possible that rates will one day go back down to 3%, though if current trends hold that's not likely to happen anytime soon.

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