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What’s the ‘Lock In’ Effect? Break Free Using Home Equity

Timm Ready, CMA,  Sr. Mortgage Advisor

March 11, 2024 — 4 min read

What's the 'Lock-In' Effect? Break Free Using Home Equity

If you’re shopping for a home, you’ve felt the freeze—unfortunately, interest rates don’t follow the mercury bulb. In fact, with rates still high, you may wonder if you’ll ever have the chance to purchase again.

It’s a question that promises to persist, but there's a silver lining ready to thaw: while rates play hard to warm up to, home equity has skyrocketed. If you own a home, that may be the ray of sunshine you need to keep your homeownership dream alive. Below, we share tips to leverage the equity you have in your house to boost home value and upgrade your living space this year.

What’s the “Lock-In” Effect?

The lock-in effect occurs when homeowners are reluctant to put their homes on the market, rendering them "locked in" to their current properties and mortgages. This reduces the inventory of available homes in the housing market.

Why is this happening?

Research from Fannie Mae reveals the root cause: the allure of a low mortgage rate. On top of that, studies show that for every 1 percent increase in mortgage rates, moving rates plummet by at least 9 percent. To add fuel to the fire, housing inventory has continued to decline. Similarly, the lock-in effect tightens its grip when prices increase and affordability becomes a hurdle.

It's a common practice for people to sell their homes and use the proceeds to jump into a new property; however, when purchase power is down and the market lacks a sufficient number of available homes, the challenge to find a new one intensifies.

What the “Lock-In” Effect Means for Current Homeowners

For homeowners caught in the clutches of the lock-in effect, there are strategic moves to cushion its impact.

Use home equity to fund home renovations

Recently, the Federal Reserve announced that homeowners are sitting on nearly $30 trillion in home equity, just shy of record-breaking numbers the previous year.

That comes out to about $200,000 in equity per homeowner, a sum that most lenders will allow borrowers to withdraw while ensuring a 20 percent equity cushion remains in the home.

What’s the ‘Lock In’ Effect? Break Free Using Home Equity

How to tap into your home’s equity

If you’re considering updating, expanding, or remodeling your home, costs add up fast. Luckily, there are programs to help you tap into your home's equity to fund these projects.

Home Equity Line of Credit (HELOC)

This option provides a revolving line of credit that you can draw from as needed. It allows you to borrow funds incrementally and pay interest only on the amount you use. Remember to keep an eye on rate changes with HELOCs that may come with variable rates. Click here to learn more.

Home Equity Loan

On the flip side, a home equity loan offers a lump-sum amount upfront with a fixed interest rate, making it a straightforward choice for those with specific project costs in mind. This option is ideal for one-time expenses. Click here to learn more.

Cash-Out Refinance

This option involves trading your existing mortgage for a new one, borrowing more than you owe and pocketing the difference in cash. This can be an effective way to secure a lump sum for your home improvement endeavors, but be mindful of potential twists in interest rates. Click here to learn more.

RELATED: Love Your Home? Speak Your Heart with a Cash-Out Refinance

Fix & Flip Loans

If you're eyeing a renovation project with the intent to sell, these specialized loans cater to short-term property improvements, offering a quick infusion of cash to revamp your space and enhance market value. Click here to learn more.

203K Rehab Loans

Snag that perfect home in your dream neighborhood at the right price, even if the kitchen and bathroom are due for an upgrade. Tailored for major renovations, these loans cut through financial clutter by bundling purchase and renovation costs. Click here to learn more.

What’s the ‘Lock In’ Effect? Break Free Using Home Equity

Plan for future refinance opportunities.

The majority of mortgages have a repayment term of 30 years, and over the past three decades, mortgage rates have fluctuated from over 9 percent to under 3 percent. While buying a new home at a higher rate may seem pricier, the possibility of refinancing to a lower rate in the future offers a strategic way to navigate the ups and downs of the market.

Looking to Invest but Now Sure It’s the Right Time?

Whatever you’re working toward, we’re here to help! Contact your neighborhood Mortgage Advisor today, or click here to receive a free customized quote.

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