Clare Trapasso/ Feb 6. 2024

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Everyone talks about assumable mortgages and how they can offer homebuyers 3% and 4% mortgage rates. What are these loans and how can I find one?

Assumable mortgages seem to be all the rage these days—if you’re able to snag one. But buyers should note they can come with some very expensive caveats.

What is an assumable mortgage?

These loans are just what they sound like. They are the original loans taken out by sellers when they purchased their homes. When the homeowners sell their homes, the new buyers then “assume” their mortgages.

The advantage to today’s buyers is many homeowners locked in record-low mortgage rates during the COVID-19 pandemic. By passing the mortgage on to buyers, sellers allow the new owners to enjoy the lower rates as well. This can add up to some hefty savings.

About 29% of all homeowners have loans with mortgage rates below 3%, according to a recent® report. About 38% have rates between 3% and 4%, while 15% have locked in rates between 4% and 5%.

Meanwhile, rates averaged 6.63% for 30-year fixed loans in the week ending Feb.1, according to Freddie Mac.

That means if you’re purchasing a median-priced home of $409,500 with 20% down at today’s rates, you would have a monthly mortgage payment that is 52% higher than someone with a 3% rate. You would be paying nearly $718 more a month.

You’ll also likely be saving money on the loan itself with fewer upfront costs and a shorter loan term.

Where to find assumable mortgages

Do assumable mortgages sound too good to be true? Well, there are some big catches.

As enticing as those lower rates might seem, only a few kinds of loans can be assumed. Only Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and U.S. Department of Veterans Affairs (VA) loans are eligible. Conventional mortgages generally are not.

Even if sellers can transfer their mortgage, buyers still need to be able to qualify for these loans. That means buyers will still need high enough credit scores and low enough debt to be able to assume the mortgages as well as potentially meet other criteria for these loans.

Buyers do not need to be veterans to assume a VA loan, but sellers might be reluctant to give up this benefit, especially to a civilian buyer. They could lose some of their VA entitlement through the transaction.

Note: Sellers might also be on the hook if the new buyers don’t make their monthly mortgage payments. For example, with USDA loans, which represent a little less than 1% of all mortgages, the original borrower is still liable if the new owners default on the loan.

So homeowners considering an assumable mortgage might want to speak with their lender and real estate attorney to ensure they are released from any liability before transferring their loans.

Buyers may have to bring a lot more cash to the closing table

Another concern is that assumable mortgages aren’t always the most affordable option, especially for cash-strapped, first-time homebuyers.

Say you hope to assume a mortgage on a $400,000 home. Well, the sellers have been steadily paying off their loan and the home has appreciated in value. So the sellers’ mortgage is only for $250,000.

That means you, the buyer, would be responsible for bringing $150,000 to the closing table.

Many first-time buyers don’t have that much money lying around, so they will need to take out an additional loan to cover the balance. But second mortgages are often harder to qualify for and typically come with higher mortgage rates and fees.

Plus, you might still be required to make a down payment to secure a second loan.

What to consider before assuming a mortgage

Before assuming someone else’s mortgage, make sure it makes financial sense to do so.

You might want to consider how much lower the sellers’ mortgage rate is than what’s available on the market. How much money will you be required to bring to the closing table? If you have to take out a second mortgage and the sellers don’t have a very low rate, will you be saving money every month by assuming their mortgage? Will you save money over the long term?

Only you can figure out if the pros of an assumable mortgage outweigh the cons. Good luck!