There is a little-known trick that can enable purchasers who are having trouble affording a house in the face of persistently high mortgage rates and skyrocketing property prices 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.”
Assumable mortgages in the US number at 12.2 million, according to Intercontinental Exchange data. That makes up 23% of all mortgages in the US.
Assumable loans do have certain disadvantages, such as a lengthier approval procedure, according to Tozer, even if they could be advantageous to both parties in a house purchase deal.
“The sellers should be able to get an extra 1% or 2% for their home to compensate them for the value they are transferring,” he stated. “The buyers’ advantage is that they can have a lower mortgage payment over the life of the loan than they would have gotten with a new mortgage.”
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A little-utilized advantage of federal financing
Ellen Harper, a mid-fifties software analyst, learned about assumable mortgages in the autumn and closed on a house in Fairburn, Georgia, with a 2.49% mortgage rate in April.
Harper will save thousands of dollars in monthly mortgage payments thanks to securing that extremely low rate. The average 30-year fixed-rate mortgage was 7.10% in mid-April, the highest since November.
“I just decided I wanted to see how low I could pay on the interest rate,” Harper stated. “I went into it looking for the best deal I could get, and I think I did pretty good.”
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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.
Let’s take an example where 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 though the second loan’s mortgage rate might be high, if the expected mortgage rate is low enough, the whole monthly payment might be less.
For some potential homeowners, landing a cheap mortgage rate like Harper’s in the current high interest rate climate may seem like the ultimate fantasy come true, but it’s not always an easy procedure.
According to Tozer, because the VA and FHA set a cap on the amount of money lenders may make processing these applications, they frequently postpone accepting mortgage assumptions.
