Homes listed for sale in Boulder, Colorado on February 15, 2017.
A U.S. News & World Report study found that nowhere is the gap larger than in Colorado between the average interest rate mortgage borrowers are facing and what the market is charging, which can be a big disincentive to selling.
Colorado's mortgage rate fixing gap, also known as the “golden handcuffs,” is the largest in the nation at 3.45 percentage points. This reflects the difference between the state's first-quarter average mortgage rate of 3.8%, the lowest in the state, tied with California and Utah, and the market average rate of 7.25% for Colorado borrowers.
According to the Federal Housing Finance Agency, Texas has the smallest fixed rate spread at 2.55 percentage points, while the national average is a fixed rate spread of 3.15 percentage points and an existing mortgage rate of 4.1%.
“Colorado's largest disparity means homeowners may be hesitant to sell or trade up for higher mortgage rates and monthly payments because they may not be able to afford it,” said Erica Giovannetti, the magazine's mortgage expert.
In Colorado, if interest rates on a typical debt amount increased from 3.8% to 7.25%, you'd pay $1,020 more per month, factoring in the state's high home prices. Unless a life situation, like a divorce or having more children, forces you to make the change, there's not much benefit to doing so.
So how did Colorado homeowners end up with one of the largest mortgage lock-in gaps in the country?
Colorado residents have an average credit score of 753, higher than the U.S. average of 739. Borrowers with higher credit scores can borrow at a lower cost because lenders deem them less likely to default. The average down payment is also over 20%, which also contributes to lower borrowing costs.
Giovannetti said rates tend to be higher in states where the legal process of repossessing a home as collateral for a loan is more complicated and favorable to defaulters. Colorado is in the camp of non-judicial foreclosure states where the process is more streamlined.
Another explanation has to do with timing: The average mortgage term in Colorado is four years and nine months, while the average mortgage term nationally is one year older. Many Colorado mortgage holders likely bought homes and refinanced their existing mortgages in 2020 and 2021 when interest rates were at historic lows.
In theory, a larger locked-in gap should put downward pressure on the inventory of homes for sale, but new listings rose 11.8% in the first half of this year despite rising mortgage rates, according to the Colorado Association of Realtors.
According to CAR, Colorado had 24,830 homes and condos available for sale as of the end of June, up from 20,295 at the end of June 2023. Year-to-date sales are down 4.4%, but that's not enough to explain the increase in inventory.
Sellers may be able to opt out of the gold handcuffs because they have built up enough equity in their existing homes that they can lower their payments by making a larger down payment, and when buying a new home, homebuilders are subsidizing interest rates, further reducing monthly payments, Giovannetti said.
The real estate market is softening and sellers may have noticed, so now is the time to act.
“Across the country, inventory is rising as buyers become more cautious. Interest rates, combined with general economic uncertainty, have left buyers sitting idle. Purchasing conditions have fallen to levels seen only twice since the 1960s,” Colorado Springs-area Realtor Patrick Muldoon said in comments accompanying the CAR report.