Jun
For prospective homebuyers daunted by today’s soaring interest rates, there’s still a way to lock in a coveted 3% mortgage rate. However, this opportunity comes with a significant caveat: it often requires a substantial cash payment.
One underutilized strategy is the assumable mortgage. This allows buyers to take over an existing loan — including its attractive interest rate, typically well below the current 7%. This approach can potentially save buyers thousands in a stagnating real estate market. However, it does necessitate covering both the remaining balance of the seller’s loan and any equity accrued.
Currently, less than 1% of home listings highlight an assumable loan, largely because most transferable loans are government-backed. However, if buyers are proactive, they might discover that approximately 20% of homes with mortgages could offer this option.
Understanding Assumable Mortgages
Assumable mortgages let buyers inherit the seller’s remaining loan balance, payment schedule, and interest rate. This process requires approval from the lender for both parties. Buyers should be prepared for higher upfront costs. These may include standard closing fees and potential additional charges for processing and legal documentation. They must also bridge the gap between the home’s sale price and the outstanding loan balance.
Consider a scenario: a couple bought a home for $300,000 with a $250,000 FHA loan at a 3% interest rate four years ago. They’ve paid off $50,000 and now wish to sell the home for $400,000. A buyer assuming this mortgage would need to pay the couple $200,000 plus assume the remaining $200,000 loan balance. If the buyer doesn’t have sufficient cash, they’d need to secure a new loan at the current higher rates, which diminishes the overall savings. According to Melissa Cohn, a regional vice president at William Raveis Mortgage, it’s essential to crunch the numbers. This helps determine the financial viability.
“If you can take advantage of it, it’s a great opportunity,” she said. “But you have to do the math.”
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Exploring Creative Financing Solutions
With interest rates much higher than in recent years, buyers are increasingly seeking innovative financing strategies. The monthly payment on a median-priced home of $429,950 with a 6.9% interest rate and a 10% down payment now stands at about $2,550. This is nearly double the cost compared to 2021 when rates were at historic lows, according to Realtor.com.
Hannah Jones, a Realtor.com research analyst, notes that acquiring a loan with a lower rate and shorter term could save buyers thousands. However, despite the potential savings, mortgage transfers are uncommon.
As of May, only 0.5% of home listings advertised an assumable mortgage, per Realtor.com data. Although this is twice the number from the previous year, the best strategy for buyers might be directly inquiring whether sellers have an assumable mortgage they are willing to transfer.
Typically, lenders restrict assumable loans to government-backed mortgages, such as those from the FHA, USDA, and VA, which encompass about 20% of U.S. homes with a mortgage rate. Government-backed loan limits can reach up to $1 million in high-cost areas like New York.
Keith Gumbinger, Vice President of HSH Associates, points out that even locating these loans is challenging amid the current shortage of available homes. “We have very thin inventories of homes for sale of any kind in most marketplaces,” he said.
A Selling Point for Homeowners
As housing inventory begins to rise after a prolonged drought, sellers might find it harder to attract buyers. Sellers looking to close deals quickly or struggling to generate interest should consider highlighting an assumable mortgage, according to Hannah Jones. Offering alternative financing can be a powerful marketing tool. According to Redfin, this is particularly true if their mortgage rate is below 6%, which applies to nearly 90% of homeowners.
Adding the option of an assumable mortgage could not only make a home more appealing. It could also provide sellers with greater leverage in price negotiations.
“As inventories start to climb, we’ll see home sellers wanting to find ways to sell quickly,” Jones said. “For homeowners, offering an assumable mortgage is another lever to make the home more attractive to a buyer.”
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