An assumable mortgage is a temporary solution that can assist certain homeowners who are having difficulty breaking into the difficult real estate market. However, there are hazards involved.
Want a cheap rate on a mortgage? Accept someone else’s
A little-known workaround exists that can allow purchasers who are having trouble affording a home in the face of persistently high mortgage rates and skyrocketing property values to go back in time to the era of extremely cheap monthly mortgage payments. However, there are a few restrictions.
Mortgages that enable a buyer to assume the seller’s current mortgage are known as assumer mortgages. This implies that the buyer keeps the seller’s mortgage balance, payback schedule, and—most importantly—lower interest rate. This kind of financing is suggested by several experts as a possible means of stimulating the flagging property market.
Ted Tozer, a non-resident fellow at the Urban Institute and a former president of Ginnie Mae, a government-owned company under the Department of Housing and Urban Development, stated, “It’s a really great program for today’s market.”
Based on data from the Intercontinental Exchange, about 12.2 million mortgages in the United States are estimated. That makes up 23% of all mortgages in the US.
Assumable loans do have certain disadvantages, such as a longer approval procedure, according to Tozer, even if they could be advantageous to both parties in a house purchase deal.
“To compensate them for the value they are transferring, the sellers ought to receive an additional 1% or 2% for their home,” he stated. “The benefit for the buyers is that they can get a lower mortgage payment than they would have with a new mortgage over the course of the loan.”
One seldom utilizes advantage of government financing
After first learning about assumable mortgages in the autumn, Ellen Harper, a software analyst in her mid-50s, closed on a house in Fairburn, Georgia, with a mortgage rate of 2.49% in April.
Harper will be able to secure a very cheap mortgage rate, which will result in monthly payment savings of hundreds of dollars. The 30-year fixed-rate mortgage averaged 7.10% in the middle of April, which was the most since November.
Harper explained, “I just decided I wanted to see how low I could pay on the interest rate.” “I thought I did pretty well for myself, considering I went into it looking for the best deal I could get.”
While not all mortgages can be assumed by a buyer, the majority of government-backed loans, including those from the US Department of Veterans Affairs and the Federal Housing Administration, can.
According to official data provided to CNN, the number of assumed FHA-backed loans increased by 111% between 2021 and 2023, while the number of assumed VA-backed loans increased by 713% during the same period.
However, mortgage assumptions are still comparatively uncommon in the US real estate market. The agency reports that there have only been 2,973 FHA-backed mortgage assumptions made so far this year.
What is the process for assumable mortgages?
Getting accepted for a new home loan involves a slightly different process than taking over an existing mortgage.
Assume, for instance, that a seller with an assumable loan decides to list their house for $500,000 with a $300,000 mortgage debt. The difference between $500,000 and $300,000 represents the seller’s current equity of $200,000 in that scenario.
A buyer would need to pay the seller $200,000 in cash to cover their equity stake in order to take over the seller’s mortgage. After that, the buyer would assume responsibility for the sellers’ current mortgage payments each month.
$200,000 could seem like a lot of money up front to purchasers. According to Tozer, some people take out a second mortgage to pay for the equity payment. Furthermore, even if the second loan’s mortgage rate is high, if the projected mortgage rate is low enough, the whole monthly payment may still be less.
An assumable loan typically needs to be approved by the VA, FHA, or other government body backing the loan in addition to the seller’s lender. This implies that, in addition to navigating several levels of approval, a homebuyer must also fulfill certain income and credit requirements.
Want a cheap rate on a mortgage? Accept someone else’s
