Is it still possible to find a mortgage with an interest rate as low as 3%? With APRs creeping into the 7 and 8 percent territory for new conventional loans, unless you bought a house before 2022 then that ship has sailed.
However, you may be surprised to learn that there’s a special arrangement where home buyers may still be able to get those special super-low rates from just a few years ago. This can be done using something called an assumable mortgage. In this post, we’ll explain what those are and how you could go about getting one.
What Is An Assumable Mortgage?
An assumable mortgage is a unique home-buying deal where a buyer essentially takes over or “assumes” the existing mortgage on a property. Instead of applying for a brand new conventional mortgage, the buyer agrees to take over paying off the remaining balance under its current terms and conditions.
For instance, let’s say you find a house that’s selling for $300,000. The loan qualifies as assumable and the owner still owes the bank $200,000. Therefore, you’d have to bring to closing the difference between the asking price and mortgage balance: $100,000. However, you’d get the ability to take over the seller’s existing mortgage, which most likely carries a much lower APR than what you’d find today.
What Are the Benefits of an Assumable Mortgage?
The main advantage of assuming someone else’s mortgage is a lower interest rate. Getting a mortgage with a rock-bottom APR helps you both now and in the future.
For example, suppose you borrowed $300,000 from a mortgage lender at today’s average rate of 8.0%. Under these conditions, your monthly payment would be $1,834.
Now let’s say you found a comparable property that qualifies for an assumable mortgage, and the seller’s current rate is 3.0%. Using the same inputs, your new monthly payment might now only be $1,054. That’s a monthly savings of $780!
Over time, that difference in interest rate is really going to be substantial. For the 8.0% mortgage, you’d pay $410,388 in total interest over the life of the loan. However, for the loan with a 3.0%, you’d pay just $129,444. That’s a whopping difference of $280,945!
On top of that, assumable mortgages can also sometimes have easier qualification requirements. They can also help expedite the closing process and lower the fees involved.
Which Mortgages Qualify to Be Assumable?
Not all mortgages can be assumed. Generally speaking, a buyer would need to find a seller that already has one of the following three types:
- FHA (Federal Housing Administration) loans
- VA (Department of Veterans Affairs) loans – Note: New buyers must meet VA eligibility requirements.
- USDA (United States Department of Agriculture) loans
Unfortunately, the grand majority of conventional mortgages would not qualify for assumption.
How Do You Find Assumable Mortgage Homes for Sale?
There are a few ways to find properties in your area that may qualify for an assumable mortgage. Many popular real estate search sites like Zillow have an advanced feature where you can seek out active listings that are assumable.
However, don’t be surprised if you don’t get many search results. A lot of sellers and agents either don’t list assumable mortgages or even know that it’s an option. Therefore, you might have to do a little extra legwork to find a good one.
Usually, this can be accomplished by working with an experienced real estate agent. They’ll be able to look up which loans would qualify for assumption and then work with the seller to see if they’d be interested in this option.
What Are the Drawbacks of an Assumable Mortgage?
While it’s clear that an assumable mortgage can help save you a lot of money in the long run, there will be a few important caveats to be aware of if you decide to go this route.
Needing a Large Down Payment
As we demonstrated in the example above, the buyer has to shore up the difference between the asking price of the house and the remaining mortgage balance. Depending on how long the seller has lived at the property, this amount could be tens or even hundreds of thousands of dollars.
For most households, coming up with that much capital as a down payment can be anywhere from challenging (putting it mildly) to next to impossible. That’s why no matter what type of mortgage you’re planning on pursuing, it’s always best to budget your money and stockpile the difference in a bank account that’s separate from your regular checking account. You never know when there might be an emergency or opportunity that calls for it.
Limited Selection
While plenty of mortgages are FHA, VA, or USDA, they only make up about 18 percent of the mortgage market. The vast majority of properties sold in the U.S. are purchased with a regular conventional mortgage.
This means that when you go to search for available properties, you’re not likely to encounter very many. Especially at times when supply is limited, this can make finding that perfect one very frustrating.
Little Flexibility
When you assume a loan, you have to accept one hundred percent of the terms that were first established between the seller and their mortgage company. That means if you have a lender that you prefer to work with or prefer other terms, you’re out of luck.
Qualification Challenges
All mortgage lenders have certain criteria that applicants must meet, including those pursuing an assumable mortgage. If your credit score or employment situation isn’t stellar, then this can create some problems.
Seller’s Liability
One of the sticking points of an assumable mortgage is that the original borrower may still be liable if the buyer who assumed it defaults. For this reason, sellers should be careful about who they work with and even consider legal counsel for additional protection.
In summary, assumable mortgages can be extremely beneficial to people looking for a great interest rate. However, there will be some challenges to finding one that checks all the right boxes. Therefore, it may be best to keep an open mind when looking for your next home and consider all of your options – even if it involves going the route of a conventional mortgage.
Featured image credit: Pexels
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