Scoring a low interest rate on your mortgage has become an exceedingly difficult challenge with today’s housing market. The idea of a once achievable 3% mortgage rate now seems like a long-ago fever dream.
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While rates aren’t expected to return to those levels anytime soon, there’s one strategy gaining attention — the assumable mortgage. This unique approach could help buyers lock in a lower rate than today’s average, but is it really a smart move?
Here’s what you need to know about how assumable mortgages work, their benefits, and the potential drawbacks before you dive in.
Quick Take: What Is an Assumable Mortgage?
An assumable mortgage is when a homebuyer assumes (takes over) the seller’s existing mortgage under the original terms, including its interest rate, repayment period and remaining balance. This allows the buyer to take advantage of a lower interest rate secured by the seller.
However, keep in mind that not all mortgages qualify. Here are some common examples of loans that are assumable:
- FHA loans
- VA loans
- USDA loans
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Benefits of Assumable Mortgages for Buyers
The most obvious reason to assume a mortgage is that you can get an interest rate that isn’t available through other financing, such as a 3% interest rate that a seller locked in earlier, versus the 6.4% going rate. This can significantly lower your monthly mortgage rate and interest paid over time on the principal.
Another benefit is that with an assumable mortgage, you may have lower closing costs if it doesn’t require a new appraisal or loan origination fees. Here are some of the biggest pros for buyers:
- Securing a lower interest rate or a rate far below current market levels
- Some assumptions skip appraisals and origination fees, saving buyers money on closing costs
- Lower interest means smaller monthly payments and less paid over the life of the loan, leading to more long-term savings
Advantages for Sellers
There are also advantages for sellers. Homes with assumable mortgages can attract more buyers in a sluggish housing market. The added value of a low-interest mortgage may also justify a higher asking price.
How To Qualify
While this sounds like a fabulous deal, remember that it’s not a magic solution. You still have to meet qualifying criteria for a home loan, such as having good credit, sufficient income and a solid debt-to-income ratio. The process itself could also be just as rigorous as applying for a new loan.
Upfront Cash or Second Loan
The biggest caveat is that the buyer has to cover the difference between the seller’s mortgage balance and the home’s current sale price. So, say a house is selling for $500,000 and the seller only owes $400,000, the buyer must bring $100,000 in cash — or take out a second mortgage, often at today’s higher rates. This can sometimes negate some or all the savings from the low-rate assumed mortgage.
A Potentially Longer Process
Not all mortgage servicers are equipped to handle assumptions, so the processing time can stretch well beyond the typical 30- to 45-day closing window. This might also make some lenders reluctant or slow to act since they make more money originating brand new loans.
Hidden Costs
Though your closing costs could be lower, there can still be fees for processing the assumption, legal paperwork and new title insurance. Some servicers may charge up to $1,800 in assumption fees, and some buyers may still want inspections and their own appraisals.
Final Take To GO: Finding Assumable Mortgages
If the idea still appeals, you can start looking for assumable mortgages through platforms like Roam, which specialize in listing homes with them. These services can also assist in navigating the assumption process.
Assumable mortgages provide a unique path to homeownership, offering potential financial benefits in a high-interest-rate market. However, be sure to consult with a mortgage professional before making a decision.
Caitlyn Moorhead contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: This Mortgage Hack Could Lock in a 3% Interest Rate — But Is It Worth It?
