House Hacking at Today’s Mortgage Rates: What Changed, and Where It Still Works

Most homeowners are sitting on a rate nobody can get today

Start with why the market feels stuck. When rates went from roughly 3% to roughly 6.7%, the people who already owned homes did not become worse off. They became harder to move. Selling means giving up the loan, and the loan is now the most valuable thing many of them own.

The Federal Housing Finance Agency, the government regulator that oversees Fannie Mae and Freddie Mac, keeps a nationally representative 5% sample of the country’s mortgages called the National Mortgage Database.^[S1] It shows how far that pool has shifted.

Two things are true at once here, and the second one matters more than the first.

The worry: half of American mortgage holders still pay under 4%. Those owners have a strong financial reason not to sell, which keeps starter homes and small multi-unit buildings off the market. That is the lock-in effect, and it is the main reason inventory has stayed thin.

The data: the lock is loosening. The share under 4% peaked at 65.1% in early 2022 and is now 49.9%. The share under 5% fell from 85.6% to 66.7%. Meanwhile 22.1% of outstanding mortgages now carry a rate above 6%, up from 7.5% in early 2022, about three times the share.^[S2]

The lock-in effect is loosening: fewer owners now hold a rate they cannot bear to give up.

Where that leaves you: the buyers you are competing against are increasingly people who also took a high rate. That is a fairer fight than it was in 2022. It is too early to tell whether this translates into more listings in any particular metro, because the national pool moving does not tell you what one county is doing.

What the rate era did to a single building

National averages are hard to feel. Here is the same idea applied to one purchase, using the duplex I bought as the example.

I paid about $470,000 for it, with 3.5% down, roughly $16,450 out of pocket, on a 30-year fixed loan. I locked a rate under 4%. Nothing about the building changes in the comparison below. Same price, same down payment, same loan. Only the rate moves.

That gap is the whole story of the rate era in one line. It is also why I am careful about how I describe my own purchase. I did not out-negotiate anyone. I bought at a moment when money was cheap, with a down payment that came out of the equity in my starter home, and the timing did more work than any decision I made.

What this does not mean. It does not mean the strategy stopped working. It means the margin got thinner, so the building has to do more of the work. At 3% a mediocre duplex still penciled out. At today’s rates the rent has to carry most of the payment, which is a much smaller set of buildings.

Which metros still clear the bar

This is the part the Foothold Index was built to answer. The question it asks is narrow on purpose: where can a cash-limited first-time buyer purchase a 2 to 4 unit building, live in one unit, rent the others, and carry a payment that fits local incomes with a cost of owning near or below renting.

Of 83 metros screened, 11 qualify. The chart below shows how much each of them saves you each month versus renting comparable space, once the rent from the other units is applied against the full payment.

The worry: three of the eleven qualifying metros now come out negative. In Grand Rapids, Toledo and Memphis, owning the median surviving listing now costs more each month than renting comparable space. A buyer there pays extra each month for the equity.

How far rates would have to fall

How far the rate would have to fall for those three to flip back, and which metros still clear at 7.50%, is in the rate sensitivity table: the same 83-metro screen re-run at every quarter point from 5.00% to 7.50%.

How wide the spread is across the eleven

The data: the spread across the eleven is wider than the list length suggests. Syracuse leaves $716 a month on the table. Grand Rapids takes $103 out of your pocket. That is an $819 monthly difference between two metros that both cleared the same screen.

Where that leaves you: qualifying is not the same as working. The screen is a filter, not a recommendation, and the three negative metros are the clearest evidence of that. If you are looking at one of them, the median listing will not carry itself and you need to find something better than the median.

A caveat I want to be direct about

I have not lived in these markets. I own one duplex in one city. The index is built from listing data, rent data, tax records and crime statistics, not from my personal knowledge of Syracuse or Memphis. Anyone who actually works in one of these metros will know things the model does not, and if that is you, I would rather hear it than guess.

Rates are only half of the financing problem. On lower priced buildings the harder part is getting a small loan written at all, which I covered in why a $100,000 mortgage is hard to get.

Frequently asked questions

What is the mortgage rate lock-in effect?

The mortgage rate lock-in effect is the tendency of homeowners to delay selling because their existing mortgage carries a lower interest rate than they could get on a new loan. Selling means replacing a cheap loan with an expensive one, which raises the cost of moving even when the sale price is good.

Does house hacking still work at higher mortgage rates?

House hacking still works at higher mortgage rates, but in fewer places and on fewer buildings. Of 83 metros screened by the Foothold Index, 11 qualify, and in 3 of those 11 owning the median qualifying listing costs more than renting.

How much more does a higher rate cost on the same house?

The extra cost of a higher rate on the same house is $1,013 per month and $364,399 in additional interest over a 30-year term, on a $453,550 loan, comparing the 2021 average rate of 2.96% with a 6.66% rate. The property, the price and the down payment are identical in both cases.

Which metro leaves the most money after the mortgage payment?

Syracuse, New York leaves the most money after the mortgage payment among the 11 metros that qualify, $716 a month on the median surviving listing. Rochester and Albany follow at $563 and $558. These figures are what owning saves you each month versus renting comparable space, once rent from the other units is applied against the full payment.