Mortgage interest rates in 2024 are still elevated, with the typical 30-year loan coming in at 6% or 7% in most cases. There are few signs that interest rates will drop in the near future, after the Federal Reserve decided to keep rates the same until inflation drops more.
Higher interest rates have put a significant damper on the real estate market, with home sales down significantly from three years ago. Many homeowners are opting to sit the market out and wait for conditions to improve. Meanwhile, homebuyers are waiting for interest rates to drop. This wait-and-see approach to the market has led to fewer sales and purchases in 2024.
In a high interest rate environment such as we have now, there is understandable and growing interest in assumable mortgages to save on interest charges. This article explains everything about assumable home loans and why you may want one. If you are interested in a conventional loan, VA loan, or FHA loan, our loan professionals at Refiguide.org have you covered!
How Does an Assumable Mortgage Loan Work?
An assumable mortgage is a mortgage loan that the lender may transfer from the original borrower to the next borrower.
The mortgage interest rate and payment period do not change when the new borrower takes over the loan.
For instance, if you are buying a home with a 30-year assumable loan that is three years old, you have 27 years to pay it off.
The interest rate on the loan stays the same, as does the length of the loan. The only thing that changes is the name of the person on the loan.
People are interested in assumable home loans in high-interest rate environments.
If you can find a home you like with a low interest mortgage, you could save thousands in interest if you can assume the mortgage. For example, suppose you found a home with a 3%, 30-year loan taken out in 2019. You could potentially assume the mortgage with a 3% rate for 25 years, as opposed to getting a new, 30-year mortgage at 6% or 7%. This is a big mortgage interest savings!
Which Home Loans Are Assumable Loans
There are many assumable home loans, but not every loan is. You can usually assume a federally backed mortgage, but not all loans qualify. For example, there is an assumable FHA loan and an assumable VA loan. FHA loans are backed by the Federal Housing Administration. VA loans are backed by the Department of Veterans Affairs.
How Do You Assume a Mortgage?
Assuming a mortgage doesn’t happen on its own. You must have the lender’s permission. However, some buyers may be tempted to assume the mortgage from the current owner without telling the lender. This is a significant risk that you should not attempt. If the lender learns that you assumed the mortgage without telling the lender, they could call the loan due. Also, if the seller’s name is still on the mortgage, they are liable if you do not pay.
A correctly executed loan assumption involves the new borrower being qualified by the loan provider the same way as the previous borrower. The lender will run your credit report and also obtain your employment and financial information. They will qualify you the same way as they did the previous borrower. Once you have been approved to assume the mortgage, the lender will release the previous borrower from liability.
How Do You Find an Assumable Mortgage?
As noted before, you may be able to find FHA, VA, and USDA assumable mortgages that can save you interest over current rates. You can look for assumable mortgages by putting the keyword ‘assumable’ when you are looking for a home on traditional real estate websites. Another option is to look for pre-foreclosure listings and call the owner to see if they want to sell it and have you assume the mortgage instead of a foreclosure.
What Are the Advantages of an Assumable Mortgage?
For the buyer, you may be able to secure a lower interest rate in a high-rate environment. This means you could potentially buy more home because the payment will be lower with a lower rate. You could, for example, save hundreds per month in interest with a 3% rate as opposed to a 6.5% rate.
Second, the buyer may pay lower closing costs because it costs the lender less for you to assume the old mortgage. Buyers doing a loan assumption also may not have to do a new appraisal.
For the seller, it is generally easier to sell a home with an assumable mortgage when interest rates are significantly higher than years ago. Imagine if you were selling your home with a 4% rate and current rates are 7%. The much lower rate could tempt a buyer to purchase your home over one with a higher rate.
Second, the seller may fetch a higher price because there is an assumable mortgage. An assumable home loan in a high-rate environment is a big attractor for buyers, so you can command a higher price.
What Are the Disadvantages of an Assumable Mortgage?
However, there are considerations to think over when considering an assumable mortgage for sellers. A seller with a VA loan can have problems with a buyer takes over the mortgage.
With your VA loan, the government states that it will pay back part of the balance if the borrower doesn’t pay. The VA limits the guarantee and says the dollar amount is the entitlement. Depending on the size of the loan, some or all of your entitlement could stay locked in to the property with the assumed loan, even after the loan closes. You might not have enough entitlement to get a new loan and property. But you can avoid this issue if you sell to a military member or vet.
For the buyer, you may need to come up with a higher down payment. When you assume a home loan, you are stepping to the position of the seller. So, the loan may not cover what the house is worth.
Suppose the seller has paid the mortgage for five years and owes $150,000. You would assume the loan, but the home is worth $220,000. So, you would have to cough up the difference. This could mean taking out a HELOC or home equity loan with a higher rate and closing costs. This may mitigate some of the advantages of the assumable mortgage.
Next, FHA has criteria that the new borrower must meet when they take over the loan. These requirements include credit and income standards. For the FHA mortgage to be assumed, the previous owner must have lived there for a certain period.
You also may have to pay for FHA mortgage insurance if you take over an FHA loan, which usually must be paid for the life of the loan. The monthly payments can be $100 or more and offset some benefits of the assumable mortgage.
Assumable Mortgage Highlights
Assuming a mortgage has many benefits for buyers and sellers. The buyer can score a lower rate, and the homeowner may sell the home faster and at a higher price. If you are interested in an assumable home loans, our loan professionals at Refiguide.org can guide you on your options.
About RefiGuide
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has founded several mortgage and marketing companies and has worked as a loan officer and mortgage broker in the industry for over 25 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, and Linkedin
More articles by RefiGuide