The average interest rate on all outstanding mortgages in the U.S. is now 4.3%. You might be surprised to learn that by the end of the year, the average rate will be higher than the levels of Q1 2020, before the pandemic boom. For the average American mortgage holder, the incredible gains of the pandemic mortgage bonanza have essentially evaporated.
The average change masks a bifurcated market of course, the Haves vs. the Have Nots. There are as many mortgage holders with rates over 6% as there are mortgage holders with rates under 3% — about 20% of all mortgages are in each group.
After three years of high interest rates, the U.S. mortgage landscape has changed and that has implications for how we should look at the housing market in 2026. Here are some of the most interesting developments underway.
1. Expensive mortgage holders behave differently than low-rate mortgage holders
Homeowners who have a higher mortgage rate are less likely to hoard the property. Higher rates mean investments are less profitable. It means holding costs are higher and therefore the house is more likely to be re-sold.
It also implies that homeowners who lose their jobs are more likely to need to sell or face delinquency and even foreclosure. Foreclosures have been ultra-low for many years. There are now 10 million or so Americans with expensive mortgages, up from basically zero three years ago. These borrowers are much more likely to get into trouble with their more expensive payments. We should expect the rate of distressed sales to increase in 2026.
All of these characteristics imply greater turnover and more home sales. Every day there are fewer Americans “locked-in” to ultra-cheap mortgage payments. 2025 will finish with slightly more home sales than 2024 and 2026 should be another increase, even if market rates for mortgages stay in the 6s.
2. We’re paying off our mortgages very quickly
The loan-to-value ratio for all outstanding mortgages in the US is now only 44.2%. That means the average American homeowner with a mortgage has 55.8% equity in their home. Beyond that, approximately 40% of all homeowners in the US own the home free and clear and have no mortgage at all. That’s a huge pile of wealth.
Equity gains are not just from rising home prices. In many parts of the country, home prices are lower than they were a year ago. Overall, home prices are up just 1-2% compared to October 2024. We’re gaining equity not just from rising home prices, but also from paying down our loans. The lowest rate loans circa 2021 are already at or past the tipping point where monthly mortgage payments are going more to principal each month than to interest. Millions of Americans bought or refinanced during this period. For them, equity gains are happening very quickly.
This wealth has a few potential implications for 2026: More people may want to tap the equity for cash. If interest rates dip while unemployment rises, we could see a renewed surge of home equity borrowing. This homeowner wealth is a factor that may keep the economy growing when other factors are slowing down. It also implies that overall the foreclosure rate, while climbing a bit in 2026, cannot reach crisis proportions. Finally, in a falling home price environment, home sellers with equity power may opt out of the market, keeping a lid on supply.
3. We have a new perspective of “lock-in”
We’re all familiar with the concept of “mortgage rate lock-in.” For homeowners holding mortgages with ultra-low interest rates, it can be very unappealing to move when current market rates are so much higher. Swapping a 3% mortgage for a 6.5% mortgage is the difference of thousands of dollars per month. We’re locked in to the low payments.
One way to measure lock-in is by the difference between the average mortgage rate on outstanding mortgages and the prevailing market rate for new mortgages. The bigger the spread, the more painful it is to move.
In three years, the average rate held on all outstanding mortgages in the US has risen from 3.8% to 4.3%. By next month, the average American will have the same mortgage rate (average 4.4%) as they did in Q1 2020 before the pandemic started. As there are more people with higher rates on their mortgages, there are few people locked-in to cheap mortgages.
The longer we go with mortgage rates in the 6s, the higher the average outstanding rate will climb. The difference between the outstanding rate and the prevailing market rate shrinks every day. Every day there are fewer people locked in.
This animated chart also shows us why mortgage rate lock-in isn’t a product of the pandemic. It’s the product of the whole decade of the 2010s. While the market rate is below the outstanding rate, lock-in is accelerating. When the market rate is above the outstanding rate, lock-in is receding. We’ve now had three full years with lock-in receding.
That’s the ironic thing about this mortgage rate lock-in phenomenon. The cure isn’t lower rates. The cure is higher rates.
The U.S. housing market has been in a deep recession for three full years. Meanwhile, the U..S homeowner has been in a period of incredible financial shape. Over time, these phenomena slowly even out. There are more folks with expensive mortgages and their behavior will be very different from the lucky people with ultra-cheap pandemic mortgages. That implies home-sales growth for 2026.
