Where the Rivers Run

Home Mortgage Rates in Missouri

Gateway Arch and St. Louis Skyline.

Missouri, whose best-known city is St. Louis, faces the same challenges as the rest of the United States when it comes to real estate prices, the pressures on those prices, and many of the options that homeowners have to face these issues. While the specific growth patterns, mortgage options, and foreclosure procedures vary from state to state, there are many common elements that impact home prices nationwide. An understanding of these elements serves as a good baseline for placing the specifics that apply to Missouri into context.

General Real Estate Price Levels and Growth Trends

Average home prices across the state fall in the bottom 25% for the country. Recent research places the average value of homes in Missouri between $175,000 and $220,000. In relative terms, California and New York that have the highest average home prices in the country with average prices in each of those states above $400,000. Missouri is on par with most of the Midwest, with the exception of Illinois, which is artificially inflated by the high prices in Chicago.

Contrary to what one might expect, the most valuable homes are not located in the St. Louis area. They are higher there than in some of the more rural parts of the state, but the most valuable home in Missouri are in the southwest – the counties that border both Oklahoma and Arkansas. The average listing price for homes currently on the market in both Newton and McDonald counties is upwards of half a million dollars. Wealth and growth, however, are not always parallel. Despite the fact that prices are currently lower in St. Louis than elsewhere, the area is showing more growth.

Kansas City Skyline.

Across the state, home value have fallen by over 30%. Some experts believe that a recovery has begun, but this does not address the pressures facing commercial real estate. When the impact of mall vacancies and the affect that has on home values is considered, the picture is less attractive. While a recovery may be an optimistic spin, stabilization does seem to have begun.

Shifts in Growth

The recent sale of Budweiser (Anheuser-Busch) has led many to have concerns that growth trends in St. Louis may reverse if jobs are shipped overseas. While InBev has made no indications that this is part of their corporate vision for the company, these things can change quickly. Only time will demonstrate the true effects of this deal.

Mortgage Mechanics

Traditional Mortgages – Under a traditional mortgage, the lender (the mortgagor) advances the money to the borrower (the mortgagee). To protect its interest in the property, the mortgagor is granted a lien against the property that must be lifted before the property can be sold. In the event of a default, these two parties stand at odds and must have a court decide the matter (see the discussion of judicial foreclosure below). This is the most common mortgage structure in the United States.

Deed in Trust Mortgages – Under a deed of trust arrangement, there are three parties involved, rather than two: a beneficiary, a trustee, and a trustor. The homeowner is the trustor, because he or she is “trusted” with the capital and the property. The lender, who receives the profit in terms of interest payments, is the beneficiary. In addition, there is a third-party involved that holds the deed on the property in trust until the loan is satisfied (see the discussion of non-judicial foreclosure below). This structure is preferred in Missouri, and though it is available in other states, it is less common.

Mortgage Loan Options

Fixed Rate Mortgages – The fixed rate mortgage is still the most common type of mortgage in use across the country and in Missouri. While the most common term is 30 years, there are many mortgages written for 15-year terms as well. For those interesting in understanding existing mortgages, it should be noted that many 30-year mortgages have recently been modified under the terms prescribed by various federal programs; these were introduced to help stem the tide of foreclosures and slow the rate at which lenders were being forced to write-off loans.

Adjustable Rate Mortgages (ARMs) – Adjustable rate mortgages have received much of the blame for the real estate crisis of the last several years. The basic mechanics of this type of loan is that an initial rate is set by the bank until the first reset date. At this point, the interest rate due on the loan is linked to some nationally available rate like the prime rate. The initial rate tends to be lower because the lender is somewhat protected by the reset feature – if rates rise, lenders can earn current market rates. The problem that was created was that the initial rates were often set artificially low, allowing homebuyer to purchase homes they had no hope of affording after the first reset date. When this happened, many borrowers defaulted, exacerbating the issues in the market.

This type of mortgage is most appropriate for homebuyers who expect to move again quickly. The initial rates on these loans tend to be lower than on fixed rate mortgages. As a result, if the loan has a maximum increase amount per year, it will take some time for a break-even line to be passed. For example if a 7% fixed rate is compared to a 5% 1-year ARM with a 1% maximum rate rise, it will take 5 years to pass the break even line. This means that after five years, if the ARM increases by the maximum allowable amount every year, it will become more expensive after five years. If a homeowner plans to move before this period has lapsed, the ARM is less expensive. The danger is that circumstances will change and the homeowner will be stuck with a now higher rate.

Interest-Only Mortgages – Under this type of mortgage, the borrower is only responsible for making interest payments for an initial period that can last as long as ten years. When the principal payment period begins, however, this type of mortgage will often reset to a significantly higher monthly payment amount. For this reason, these types of mortgage have become far less common or are priced with less attractive terms.

Flexible Payment Mortgages – All but eliminated, this type of mortgage left it to the borrower to decide how much to pay on a monthly basis. While there are guidelines and limits, a borrower could choose to make an interest payment, a principal and interest payment, or even no payment at all. Lenders believed their protection was in the infallible real estate market. As prices have collapsed, this option has been removed.

Home Equity Lines and Loans – Each of these options permit a homeowner to borrow against the value of their homes. While a line is a revolving line of credit (like a credit card) and a loan is a lump-sum, these options are more expensive than traditional mortgages, but do serve a purpose. For borrowers facing conforming loan size limits ($417,000), the combination of a home equity loan and conforming mortgage may be more affordable than a single jumbo loan.

Missouri Foreclosure Procedures and Regulations

  1. Missouri lenders tend to prefer the deed of trust structure for lending money to home buyers. This permits a non-judicial foreclosure in the event of a default. If this occurs, because of the structure, the lender asks the trustee to sell the property based on the terms of the trust created in the mortgage.
  2. If a judicial foreclosure is used, meaning that a traditional lien mortgage was used when the loan was made, the lender must file suit against the borrower. The court then oversees the foreclosure process.
  3. When the lender uses the foreclosure by trustee sale approach, Missouri law requires that the sale begin with publication of the sale. The initial paperwork that must be completed prior to the sale can take as long as 60 days. Once this is completed, the publication must be made for a minimum of 10 days. This is done to ensure that a sufficient number of bidders come to the sale. If there is healthy bidding, the price will be closer to fair market value. This makes it more likely that the sale price will cover the amount of the loan. As a recourse sate, getting top dollar for a forced sale is particularly important to the defaulting homeowner.
  4. While the right of redemption is strictly limited in Missouri, the redemption period lasts for 365 days after the sale. This allows the homeowner to repurchase the home at the sale price. This option is only available in Missouri if the winning bidder at the sale was the primary lender. The lender would buy the house at auction if it believes that the fair market value is enough higher to make it a good investment. The law is written this was to protect homeowners – if the lender could purchase the home below market value and then flip the house, homeowners would lose the benefits of any equity. The law is designed to protect the interests of all parties involved.