Colorado has biggest lock-in gap on mortgages in U.S.

Nowhere does a bigger gap exist between the average mortgage rate borrowers are holding and what the market is charging than in Colorado, and that could create a bigger disincentive to sell, according to a study from U.S. News & World Report.

The mortgage rate lock-in gap, also known as the “golden handcuffs,” is 3.45 points in Colorado, the largest of any state. That reflects the spread between the state’s average mortgage rate in the first quarter of 3.8%, tied for the lowest with California and Utah, and the 7.25% rate on a 30-year loan the market was averaging recently for Colorado borrowers.

Texas has the smallest lock-in gap at 2.55 points and the national average is 3.15 points on the gap and 4.1% on the rate for existing mortgages, 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,” said Erika Giovanetti, a loans expert with the magazine.

In Colorado, going from a 3.8% rate to a 7.25% rate on the typical amount of debt would translate into paying $1,020 more a month given the higher home values in the state. Not much upside to doing that, unless life circumstances such as a divorce or having more kids force a change.

So how did Colorado homeowners end up with the widest mortgage lock-in gap in the country?

Colorado residents 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. They also have average down payments of above 20%, which can also contribute to lower borrowing costs.

In states where reclaiming a home as collateral on a loan is more legally complicated and the process tilted in favor of delinquent borrowers, rates tend to be higher, Giovanetti said. Colorado is in the camp of non-judicial foreclosure states, where the process is more streamlined.

Another explanation involves timing. The average mortgage in Colorado is 4 years and 9 months old, while the average mortgage nationally is a year older. A larger share of Colorado mortgageholders were 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% in the first six months of the year, despite elevated mortgage rates, according to the Colorado Association of Realtors.