Homeowners hoping for mortgage rate drops stuck with bad bets

Millions who decided to “marry the house and date the rate” are beginning to realize that breaking up with the rate is hard to do.

Those who bought homes at mortgage rates above 6.5 percent are discovering they can’t refinance as rates hold stubbornly above 6.6 percent, the Wall Street Journal reported. About 7.5 million households carry mortgage rates of 6.5 percent or higher, according to Intercontinental Exchange, most of whom took out these loans since 2022.

Homeowners who secured loans at 6.5 percent or higher since 2022 expected — or at least hoped — to refinance within a year or two when rates dropped below 6 percent. That never happened, however, and they’re stuck with higher monthly payments indefinitely.

Homeowners typically aim to reduce rates by at least half a percentage point to justify refinancing costs.

The rate environment has created a bifurcated market between homeowners with cheap pandemic-era loans and those burdened by higher rates. One in five Americans who bought since early 2023 regret their high mortgage rates, according to Clever Real Estate.

Some are just beginning to feel the squeeze. About 2 percent to 3 percent of new purchase mortgages since 2022 included temporary buydowns that artificially lowered initial rates. These are expiring, forcing payment increases.

Refinance activity spiked briefly in September when rates approached 6 percent, but many homeowners missed the window. One told the Journal he estimates he lost $400 monthly in potential savings by waiting for further rate drops.

Creative solutions are emerging. Some homeowners are recasting mortgages with principal payments or switching to adjustable-rate mortgages.

Economists don’t expect widespread foreclosures due to stricter lending standards from 15 years ago, but falling home prices in markets like Texas and Florida complicate refinancing prospects for underwater borrowers.

It also doesn’t help that rates aren’t showing any signs of coming down in a significant way any time soon. While mortgage rates don’t directly correlate with interest rates, they do often run parallel; hopes of an interest rate cut this month by the Federal Reserve were likely dashed by a strong jobs report last week.

— Holden Walter-Warner