Home Financing: Rural-Urban Differences
Carolyn
Rogers
Eyewire
The homeownership rate in America
is at a record high (69 percent of households).
Whether in rural or urban areas, most home purchases
are financed by a home mortgage. For rural homeowners,
however, mortgage rates are often higher than for
urban homeowners, and lenders may impose more stringent
requirements for financing a rural residence.
According to data through 2004
from the Monthly Interest Rate Survey, the effective
nonmetropolitan (nonmetro) interest rate on conventional
fixed-rate home mortgages remains somewhat higher
than the metro rate. However, the gap between nonmetro
and metro rates has narrowed since 1995. This effect
is mirrored by a growing convergence in the terms
to maturity for rural and urban home mortgages.
By 2004, the average term of nonmetro mortgages
(26.4 years) had increased to almost the same average
term as metro mortgages (26.9 years).
The apparent narrowing of differences
in the cost of conventional home loans does not
necessarily mean that rural and urban households
have similar access to financing. Underwriting standards
may make it more difficult to qualify for financing
on a rural residence. For example, underwriters
may not finance a rural mortgage if the prospective
residence lacks a nearby water hookup for fire and
emergency services. Also, a larger share of nonmetro
residences consist of manufactured/mobile homes,
which are generally financed by loans with shorter
terms and much higher effective interest rates than
those with conventional home mortgages. (In 2003,
14 percent of nonmetro and 5 percent of metro households
lived in manufactured/mobile homes.)
Data from the 2003 American Housing
Survey show that 13 percent of nonmetro homeowners
and 21 percent of metro homeowners had primary mortgages
either guaranteed or financed directly by the Federal
Government. USDA and the U.S. Department of Housing
and Urban Development are the primary Federal agencies
providing housing assistance programs for low-income
renters and owners. In rural America, USDA’s
section 502 single-family housing program promotes
home purchases by providing (1) a reduced interest
rate, direct-loan program restricted to low-income
persons who cannot qualify for loans from private
lenders, and (2) a loan-guarantee program that guarantees
repayment of market-rate home mortgages made by
private lenders to mostly moderate-income borrowers.
Such programs can help mitigate some of the cost
differences between rural and urban home financing.
The
Rural Housing chapter of the ERS Briefing Room on
Infrastructure and Rural Development Policy.
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