Colorado Borrowers Wear Tightest “Golden Handcuffs” in the Nation

Nowhere is the gap between a typical mortgage and the cost for a new loan larger than in Colorado, where “golden handcuffs” discourage homeowners from stepping up to new homes.

The spread between the average mortgage rate paid by homeowners and the rate on a new 30-year-loan is 3.4 percentage points, the largest of any state, according to the Denver Post, citing a study from U.S. News & World Report.

The mortgage rate “lock-in gap” reflects the difference between the typical 3.8 percent mortgage rate in the first quarter and the 7.25 percent rate on a 30-year loan the market recently averaged for Colorado borrowers.

Texas has the smallest lock-in gap at 2.55 points, while the national average is 3.15 points. The average national rate for existing mortgages is 4.1 percent, according to the Federal Housing Finance Agency.

“The implication of Colorado having the widest gap is that homeowners might be more reluctant to sell and trade up for a higher mortgage rate or monthly payment. They may not be able to afford to,” Erika Giovanetti, a loan expert with the magazine, told the Post.

In Colorado, moving from a 3.8 percent mortgage rate to a 7.25 percent rate on the typical amount of debt would mean paying $1,020 more a month, given the home values in the state.

There aren’t many reasons to do that, unless circumstances such as a divorce or having more kids force a change, according to the newspaper.

Colorado homeowners ended up with the widest mortgage lock-in gap in the country because residents have higher credit scores and because more residents borrowed money when rates were at historic lows.

Residents in the Centennial State have an average credit score of 753, above the U.S. average of 739.

Borrowers with higher credit scores can borrow at a lower cost because lenders view them as less likely to default, according to the Post. They also have average down payments of above 20 percent, which can also contribute to lower borrowing costs.

A larger share of Colorado mortgage holders were also likely buying homes and refinancing existing mortgages in 2020 and 2021, when interest rates were at historic lows.

In theory, having a bigger lock-in gap should put downward pressure on the inventory of homes for sale. But new listings are up 11.8 percent in the first six months of the year, despite elevated mortgage rates, according to the Colorado Association of Realtors.

Colorado’s inventory of homes and condos available for sale at the end of June was 24,830, up from 20,295 at the end of last year. Sales are down 4.4 percent year-to-date.

Sellers may have built enough equity in their existing homes to slide off the golden handcuffs and lower their payments by making larger down payments, Giovanetti said. The residential market is softening and sellers know this — so if they’re going to make a move, the time is now.

— Dana Bartholomew