Photo by Kindel Media: https://www.pexels.com/photo/couple-standing-in-front-of-their-house-7579042/
In today’s high-interest-rate environment, scoring an assumable mortgage from a seller at a lower interest rate than the prevailing market could be a potential path to homeownership for those who can’t otherwise afford access to the American dream.
There are millions of assumable mortgages available, according to Roam, a platform that helps homebuyers assume low-interest rate mortgages for a 1 percent fee.
A little-known tool, assumable mortgages can be transferred from one borrower to another. Buyers can purchase a home with an existing mortgage as low as 2 percent, which could cut monthly expenses by about half, Roam says on its home page.
“Real estate agents are pushing sub-3 percent mortgages as an amenity, just like marble countertops or a view of the mountains,” the New York Times reported in June 2023.
The current average interest rate for the benchmark 30-year fixed mortgage is 7.64 percent, having risen 9 basis points over the last week, according to BankRate.
Mortgage rates fell to historic lows below 3 percent in 2020 and 2021 during the covid pandemic. In March 2022, the Federal Reserve launched efforts to curb inflation by raising the benchmark rate, and mortgage rates skyrocketed to their highest level in 20 years.
High interest rates could be here to stay for a while, New York Times reported. Fed officials forecast higher interest rates through 2026, a sign that borrowing costs are not heading back down anytime soon — bad news for would-be home buyers dreaming of a return to 3 percent mortgage rates.
An assumable mortgage allows the buyer to buy a home by taking over the seller’s existing mortgage loan.
However, there’s a catch: most conventional mortgages are not assumable.
Loans that are assumable include those insured by the Federal Housing Administration (FHA) or backed by the Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA) are assumable with the lender’s approval. Government-backed loans accounted for 18-to-26 percent of residential loan applications in the past three years, according to the Mortgage Bankers Association’s Weekly Applications Survey.
An appraisal is not required for FHA, VA and USDA loans, which could save buyers hundreds of dollars, according to Rocket Mortgage.
About 80 percent of 1,815 mortgage holders who responded to a Zillow survey in June 2023 reported having an interest rate less than 5 percent, and almost a third reported a rate less than 3 percent.
You may be able to find a low rate, but there’s a catch: expect the down payment to be at least 15 percent, according to Ted Tozer, a nonresident fellow at the Urban Institute’s Housing Finance Policy Center.
Offering an assumable rate mortgage differentiates a seller in the marketplace and buyers may make higher offers on the property, Tozer said. An assumable loan rarely covers the full purchase price so the buyer must come up with the difference. The price difference could be covered by a second mortgage, but second mortgages are riskier for lenders. If you default, the first mortgage gets paid before the second. A second mortgage typically only covers up to 85 percent of the value of a home, meaning the buyer will be out of pocket for the balance.
Second mortgages represent another catch. They typically have higher interest rates than first mortgages and come with additional upfront closing costs, potentially outweighing the benefits of assuming an existing mortgage. It’s also more difficult to qualify for a second mortgage because the lender assumes more risk.
Most consumers don’t know that assumable rate mortgages are a benefit given to them by law, and there are millions of them, said Raunaq Singh, founder and CEO of Roam, during an interview on CNBC’s “Power Lunch.”
“This is a large part of what we’re trying to correct the record on,” Singh said. “All government loans are fully eligible for the assumption, and this is an opportunity.”
Singh said Roam is focusing on homes with mortgages that originated in 2020 or 2021. “So the loan-to-value ratio is often above 75 percent, which means that the down payment the buyer would need to make is very similar to that of a conventional mortgage — say 20 percent or 25 percent,” he said. “But the value is that their monthly payment would be about half of what it would be at today’s prevailing rates.”
Carrington Mortgage Services, one of the largest privately held non-bank lenders in the U.S., said it is educating potential buyers about assumable mortgages, letting them know it’s an option and working with buyers to identify which mortgages may be assumable.
