The current 30 year fixed rate mortgage is sitting at roughly 7.5%. You are kicking yourself for not locking in a rate that is half of what it is today. So you decide that you want to move, either by choice or by employment, but with rates that are double to what they were a year or so ago, it feels like a punch in the gut. What is one to do? Well, you can always bite the bullet, if you can afford it, and pay the going mortgage rates of today. Or you can be let in on a little known secret…the assumable rate mortgage.
With over 85% of properties having loan rates at below 5%, one solution would be to find one and assume it from the current owner. This allows the buyer to take over the loan from the seller and assume the existing rate with usually only a modest fee charged. Why doesn’t everyone take advantage of this, you may ask. Well, they’re not as easy to find as you may think. Typically, only government-backed loans are assumable and the majority of mortgage loans are conventional. According to the Mortgage Bankers Association, during the past three years, government-backed loans have only accounted for roughly 18% to 26% of residential loan applications. If you want to assume a mortgage, the seller needs to have one of the following types of mortgages:
- FHA loan
- VA loan
- USDA loan
The typical conventional loan that is made by private lenders is usually not assumable. That’s a bummer, as those are the majority of loans outstanding. Conventional loans usually have a “due on sale” clause that allows the lender to be paid in full when the property is transferred. Let’s take a look at an example if you do decide to assume a mortgage. If the sellers took out a 30-year mortgage at 4% six-years ago, the buyers would make the remaining 24 years of payments on that loan until they refinance, sell the house or pay the loan in full. However, if the buyer is assuming, for example, a $200,000 mortgage balance on a home that’s now worth $450,000, they’ll have to work out with the seller how and when they’re going to pay that $250,000 difference. The seller could demand the money upfront.
Even if you can find an assumable mortgage, take a look at the pros and cons before you enter into a transaction.
Advantages for Sellers
Easier sale: An assumable loan can make the home more marketable if interest rates have risen in the years since the mortgage was originated. This is the perfect environment for the seller who has a sub-five percent loan and wants to sell. “It’s like having an extra bedroom,” according to Ted Tozer, a nonresident fellow at the Urban Institute’s Housing Finance Policy Center. “It’s something that differentiates you from the marketplace.”
Higher price: Another advantage is that an assumable mortgage provides the seller with negotiating power on price. According to Brian Gilpin, chief financial officer of Embrace Home Loans, “If there’s a property that isn’t selling quickly, perhaps that has some flaws, buyers may be willing to overlook that if the sellers offer an assumable loan.”
Advantages for Buyers
Lower interest rate and closing costs: The advantages for buyers are pretty straight forward. The biggest one obviously being the lower assumable interest rate that is otherwise unachievable in the current market. Also, closing costs are much lower, with the buyer not needing an appraisal and other added expenses that raise the transaction cost.
Disadvantages for Sellers
There really isn’t a whole lot of downside for the seller when it comes to selling with an assumable mortgage. The one caveat to that would be if the seller has a VA loan. With a VA loan, the government guarantees that it will repay part of the balance if the borrower defaults. The seller could get around this by selling to another veteran or military member who is eligible for a VA loan.
Disadvantages for Buyers
Perhaps the biggest downside for the buyer is that they are assuming a mortgage which no longer covers the value of the house. What do we mean by that? Well, if the seller has owned the house for say five years and still owes $150,000 on the loan, this is the amount that the buyer would assume. But remember, properties usually appreciate. If, for example, the property increased in value to $225,000, the buyer would be responsible for the $75,000 difference. If you aren’t carrying that kind of cash, you’ll need a second mortgage to make up the price. This kind of defeats the whole purpose of assuming a loan, as it carries with it all the costs and expenses that you are trying to avoid. Albeit the amount that is usually financed as a second mortgage is much less.
When all is said and done, I think if you can find one, an assumable mortgage at rates under 4 or 5 percent is a no brainer.
