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Apr 16, 2024 Faculty Finance Research in Education

Fonseca featured in New York Times for research on mortgage lock-in

Gies College of Business professor Julia Fonseca was recently interviewed for a New York Times article, "A Huge Number of Homeowners Have Mortgage Rates Too Good to Give Up," in which she explains the tangible value of low interest rates and why so many homeowners are hesitant to give theirs up.

"She estimates that locked-in rates are worth about $50,000 to the average mortgage holder," the Times wrote. "That’s roughly the additional amount people would have to spend if they swapped the existing payments left on their current mortgages for higher payments at today’s rates.

“'You could think of your locked-in rate as an asset that you own,'” she told the Times. "And over this period, that asset has never been worth as much as it is now."

Finding a way to examine this up and down terrain of mortgages has been part of Fonseca’s research at Gies. Together with Lu Liu of The Wharton School, University of Pennsylvania, Fonseca has been examining this tumultuous terrain of mortgages and the very real impact that they can have on families.

Fonseca and Liu wrote a working paper titled “Mortgage Lock-in, Mobility, and Labor Reallocation,” which examines the impact mortgage rates have on labor reallocation and mobility. In other words, what effect do mortgage rates have on the decision-making process when an individual is considering moving – in particular for new job opportunities.

According to Fonseca, by March 2023, about two thirds of borrowers had locked in a mortgage rate that was under 4 percent. Higher interest rates today substantially raise the monthly payments for new mortgages.  

Additionally, these increases could affect workers’ advancement. If someone had the opportunity for a new job, but would need to move, these rate increases would have a significant, measurable impact on workers’ mobility.

“If you move, you have to pay off your loan at this very low rate and take on a new loan at a new rate, which can be very costly,” Fonseca said. “For the typical borrower, a one percentage point rise in rates increases payments by about $1,900 a year. If you have 20 years left on your mortgage, and you don’t refinance later on, that means that the present value of the payments you are going to make on your mortgage are going to increase by about $27,000. That’s a lot of money. And that creates a strong incentive for people not to move.”

As Fonseca’s research indicated, the greater the difference between a mortgage rate a homeowner currently has and the rate they would need to get if they moved, the greater the financial impact on the workers. This was an incentive to not move for the new opportunity. It was financially advantageous to stay where they were. This suggests that lock-in is preventing them from pursuing these labor market opportunities that would have been worthwhile otherwise. It could keep workers from finding the best jobs. It could keep firms from finding the best workers. And so that could have real consequences for labor markets and labor productivity.