A real estate agent shared his experience with the golden handcuff effect in mortgage lending.
While many homeowners feel trapped, she offered buyers a way out.
Bridget Thomas (@bridgetsellshouses) is a content creator and real estate agent from La Crosse, Wisconsin, about 140 miles from Madison.
In a TikTok video last summer, the real estate agent discussed how the golden handcuff effect has impacted his own homeownership experience.
She explained how she bought her current home in 2018 with an interest rate of less than 3 percent.
Thomas had experienced the golden handcuff effect himself and understood how difficult it could make it for homeowners to move.
Some buyers purchased their home with low interest rates, so the prospect of interest rates suddenly rising on a new property can be daunting.
Some buyers may have purchased a home five or six years ago when interest rates were low, but life has changed a lot since then.
What are golden handcuffs?
The golden handcuff refers to a situation where a homebuyer secures a mortgage at a low interest rate, making their current mortgage more favorable.
With interest rates so favorable, these homeowners are hesitant to relocate.
The term emphasizes that attractive financial terms on current mortgages are incentivizing residents to stay, effectively tying them to their current homes.
The real estate agent gave several examples, including people with children or whose children have left home.
Other homeowners may have experienced an aging parent moving out, a major change in income or a desire to live in a different school district.
Expert advice
She offered advice to people who feel trapped by their mortgage.
“I know some people will say I’m biased, but interest rates don’t determine your success as a real estate investor. Every homeowner is a real estate investor,” Thomas began.
She noted that homeowners can refinance, consider a different type of mortgage or apply for a different type of loan.
“The percentage is somewhat arbitrary,” she said.
Thomas explained that if homeowners want to upgrade their home and have a lot of equity in their current home, they can make a larger down payment when purchasing their next home.
This means that your mortgage principal may not be significantly more than what you currently have, or it may even be less, depending on how much equity you have acquired in your home.
“You may be charged interest on even a small principal balance, which means it could actually be as much as you’re currently paying to upgrade your home,” Thomas said.
She advised others in a similar situation to talk to their real estate agent and lender.
“Don’t go into it on assumptions, because there might be some really good opportunities out there that you don’t want to miss out on,” she said.
Many other homeowners also feel trapped by golden handcuffs.
A couple bought a 5,000-square-foot home with a pool 10 years ago, but now they’re prisoners of their mortgage.
Another homeowner said he felt he had “no realistic path forward” after buying a three-bedroom house that was “out of reach”.
