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Home Mortgage Rates in South Dakota

Mount Rushmore.

The dynamics of real estate prices in South Dakota are unique because of the presence of Mount Rushmore in the state, as well as the large amount of land there that falls within the protection of national parks. For this reason, large sections of the state are essentially unpopulated. Not surprisingly, the most valuable real estate in South Dakota borders these parks and attractions, primarily in the south west quadrant of the state. Property near the Minnesota border also tends to boast higher home values.

Given this unique set of circumstances, the trends in home values can be understood in slightly different terms. Understanding the available mortgage types, the options available to homeowners, and the foreclosure regulations is necessary for those who wish to participate in the market. While this is only a preliminary exploration of pertinent information, it can serve as a starting point for those interested in educating themselves.

Real Estate Prices

Average home prices across the state fall in the bottom 50% for the country. Recent research places the average value of homes in Missouri between $215,000 and $260,000. 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. South Dakota is on par with most of the Midwest, with the exception of Illinois, which is inflated by the high prices in Chicago. Prices are similar to those found in Minnesota and Wisconsin.

Across the state, home values have fallen by approximately 25%. While some experts have asserted that a recovery has begun in the real estate market, others believe that the affects of commercial real estate problems have not finished influencing prices. This latter group believes that further declines are on the horizon, to be accompanied by another round of foreclosures. If this second round comes to fruition, home prices could fall by another 25%.

Downtown Sioux Falls.

The most populous cities in the state are Sioux Falls (174,360) & Rapid City (74,048). All other cities in the state have a population below 30,000. There are only about a dozen cities in the state with a population of at least 10,000 people with most of the state remaining rural.

While the future remains uncertain, the evidence available suggests that rather than a recovery, a degree of stabilization can be identified. Prices may not be rising, but they have stopped declining. This is an important phase because it will give the market time to work out some of the issues that helped to create the bubble in first place. With some care, housing prices will remain stable and ultimately turn to a healthy rate of growth, rather than the unsustainable run that marked the years leading up to the collapse.

Rapid City Skyline.

The Impact of Tourism

South Dakota is a state that is highly reliant on tourism for jobs and income. In the aftermath of recent economic events the impact on South Dakota are mixed. On the one hand, people are traveling less as an obvious way to trim their budgets and save money. On the other hand, those who are still choosing to take trips are selecting vacations that are more affordable. A trip to Mount Rushmore with one’s family is more educational and less expensive that a trip to Hawaii. While the overall number of visitors to the area has fallen some, it is less dramatic that the falloff seen at other vacation destinations. Overall, this has impacted the real estate market less than in other states as well (Florida real estate has been amongst the hardest hit by the recession).

South Dakota Mortgage Structures

Traditional Lien Mortgages – The preferred way for lenders to provide capital to a home buyer wishing to purchase property is through the use of a traditional mortgage. Under this structure, the lender is the mortgagor and the borrower is the mortgagee. After the loan is made, the mortgagor receives a lien against the property. The lien remains in effect until the debt is discharged. When a default occurs the two parties to the agreement are at odds and their dispute must be resolved by a court (see the discussion of judicial foreclosure below).

Deeds of Trust – Unlike a traditional mortgage, a deed of trust is a tripartite agreement between the lender, the borrower, and a neutral third party. The lender is the beneficiary, receiving the interest payments from the borrower, who is known as the trustor. The trustee, the third party to the agreement, is a neutral party who holds the deed to the property in trust until the terms of the agreement are satisfied. The trust agreement allows the trustee to sell the property if certain conditions are met (see the discussion of non-judicial foreclosure below).

Mortgage Types

Each of the following types of mortgages can be written under either of the above structures. The following loan types describe the manner in which a lender gets paid, where the mechanics discussed above details how the lender secures its interest in the property.

Fixed Rate Mortgages – Under this structure, the borrower makes equal principal and interest payments to the lender for the duration of the loan. The majority of these loans last 30 years, although some are written for 15 years. The fixed interest rate affords the borrower a degree of protection because the rate will not increase even if rates in the general market increase. Lenders tend to charge higher rates for this type of loan because of the fixed rate. This is the best approach for borrowers when rates are very low because they can lock in the attractive rate.

Adjustable Rate Mortgages (ARM) – The initial rate charged by lenders for an adjustable rate mortgage is lower than the corresponding rate for a fixed rate mortgage. This is due to the fact that the lender can afford to charge the lower rate knowing that if rates in the general market rise, the loan will reset to a higher rate. While almost all ARMs are written with 30 year terms, there are two important time periods to be aware of when considering this type of loan: the duration of the original rate until the initial reset, and the amount of time between subsequent rate resets. Generally, the second of these numbers is one year – ARMs adjust after the first reset every year. The initial reset period may vary, however, ranging from 6 months to 5 years. The length of the initial period affect how long the borrower can take advantage of the lower rate and how long it will take with maximum loan resets for the ARM to become more expensive to the borrower than the corresponding fixed rate loan. This is an important consideration when considering which type of loan is most appropriate for one’s specific circumstances.

Home Equity Loans and Lines of Credit – A home equity loan is most typically used for home improvement projects or to help reduce the cost of a large loan amount. In the latter case, the blended rate of taking out a small traditional loan (under $417,000 to remain under the jumbo loan limit) and a home equity loan may be lower than the elevated jumbo rate. A home equity line of credit is a revolving line, like a credit card, that can be drawn upon as needed. Once the line is drawn, repayment begins; there is a minimum payment amount and a maximum credit limit.

Foreclosure Procedures and Regulations

The rules that follow are an overview of the basic guidelines for foreclosure in South Dakota. Those who find themselves involved in such a situation are strongly encouraged to consult a professional.

  1. Lenders who have provided capital under a traditional mortgage must proceed against the property of a defaulting borrower through a judicial foreclosure. This means that a complaint must be filed with the court to open a case. The court then oversees the proceedings, making rulings when needed.
  2. If the lender has made the loan under a deed of trust (which is less common in South Dakota), a trustee sale may be used in what is called a non-judicial foreclosure. Under the terms of the trust agreement, the trustee may follow set procedures to sell the property without involving the court.
  3. After a complaint is filed in a judicial foreclosure, the documents involved may take as long as 150 days to process, giving the borrower time to cure the deficiency. South Dakota also requires publication of the foreclosure. This publication must be done for a minimum of 23 days to satisfy the statute and provide sufficient time for the public to become aware of the foreclosure. The logic behind publication is that if the court orders the sale of the property, they want a healthy and robust bidding process to obtain maximum price for the property. South Dakota is a recourse state, so the procedures are designed to help minimize the amount that the borrower may owe the lender after the sale.
  4. The redemption period, the period during which the borrower may repurchase the property at the sale price, is 180 days unless the property is vacant. In the event that the property is vacant, the redemption period is 60 days. The shorter period is in place to protect the bank which may buy the property to cover its loan. If this occurs, the bank should be allowed to leave the house vacant for 60 days to give the borrower the chance to redeem and then sell the property without being concerned that the sale will be undone.

Rocky Mountain Bighorn Sheep in the Badlands.