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Assumable Mortgages: One Option to High Mortgage Rates

Fri May 10, 2024 by on News

Assumable Mortgages: One Option to High Mortgage Rates

With mortgage interest rates still hovering above 7% on a 30-year fixed loan, many home buyers are seeking financing alternatives. One such option is assumable mortgages which are  low-rate mortgages that home buyers take over from sellers. While popular in the 1980s when mortgage rates climbed to 18%, assumable mortgages are making a comeback.

Where can one find an assumable mortgage?

With mortgage rates still high, home listing websites such as Realtor.com started tagging assumable properties and making them searchable. There are more companies and start-ups that are compiling lists of eligible properties and charging homeowners a fee to navigate the assumption process.  The ability to assume a seller’s mortgage may also be part of a listing, along with other distinctive features of a property. According to Intercontinental Exchange, a data and technology firm, an estimated 12.2 million loans, or 23% of active mortgages are assumable.  Most conventional mortgages, however, are not assumable; rather, the assumption option is typically found in mortgages backed by the Federal Housing Administration, as well as the Department of Veterans Affairs. Interestingly,  while one has to be a veteran in order to obtain a VA mortgage loan, one does not have to be a veteran in order to assume a VA mortgage loan.

As we discussed in a previous blog, many homeowners who have low-rate mortgages do not wish to sell because of the “lock in effect” whereby they are concerned that their new purchase will be too costly because of mortgage interest rates.  Again, not all mortgages are assumable. Therefore, while mortgage assumptions are growing, not all home sellers are able to offer this option.

Are assumable mortgages easy to process?

While the number of mortgage assumptions is growing, this option is still just a small fraction of sales. For instance, there were more than 6,000 completed in 2023, which is up 139% from 2022. This year, there have already been 3,896 assumptions completed.

The process of successfully assuming a mortgage has challenges. For one, since many homes have appreciated in price and the assumable mortgage loans are partially paid down, there may be a significant gap between the purchase price and the remaining mortgage. As a result, potential home buyers may need to pay hefty down payments or qualify for a second mortgage, which will be at a much higher rate.

Another challenge is making sure that the loan servicer will process the mortgage assumption timely. Some assumable mortgages can take anywhere from 45 to 90 days or longer to close, in contrast to buying a home with a new mortgage generally takes a month to 45 days in many parts of the country. As a result, several start-ups have been created to smooth the process, where real estate agents who are knowledgeable about assumable loans are partnered with transaction coordinators who will call the mortgage servicer until the deal is complete.

Prospective homebuyers who are seeking assumable mortgages may also face an ongoing cost if the mortgage that they assume is a FHA loan. The homebuyer would need to pay an insurance premium, which usually runs about $194, which is an FHA program fee to cover the lender’s losses if the borrower defaults. There are also other fees involved if one obtains a VA loan that is assumable as well.

What does this all mean?

With mortgage interest rates high, low underlying mortgages, which are assumable, have become even more valuable. This provides a qualified potential homebuyer with the option to purchase a home and provides a particular seller with another tool to market the property.

From the trenches,

Roy Oppenheim