If rates rise to 5 percent or more, wouldn't it be great to find a seller who could pass along a 3.35 percent mortgage when you buy their home?
You may have heard of an intriguing strategy that lets a homebuyer take over not just a home but the seller’s mortgage, too. Taking over someone else’s home loan is called “assuming” the mortgage.
You don’t see many buyers assuming mortgages these days. But that could change. As mortgage interest rates rise – and they’re expected to – assuming a seller’s low-rate mortgage could be a great deal.
When you assume a mortgage, you get the same rate of interest the seller was paying. Imagine, if rates were to rise to 5 percent or more, how appealing it might be to find a seller who could pass along a 3.35 percent mortgage when you buy the home.
Writes The New York Times:
“In a rising rate environment, assumability is a very attractive option,” said Katie Miller, the vice president of mortgage products for Navy Federal Credit Union. “It ends up making homes that much more affordable.”
There are other benefits, too:
- You avoid many fees you’d pay with a new mortgage.
- You can skip the appraisal (but it’s a good idea to do it anyway.)
- You get out of the hefty upfront mortgage insurance premiums required on FHA mortgages. You still have to pay monthly mortgage insurance premiums, though, says The New York Times.
Helps sellers with marketing
For sellers, an assumable loan is one more advantage for marketing the home, The Times says:
“You could now have a seller saying, ‘I have a great house to sell you and a great mortgage to go with it, which is better than my neighbor, who only has a great house,’” said Marc Israel, an executive vice president of Kensington Vanguard National Land Services and a real estate lawyer. “It’s a very clever idea.”
How it works
When you assume someone else’s mortgage, you take over where they left off. That means both the interest rate and loan balance (the amount owed) will be the same as the seller’s.
Here’s an illustration:
The seller paid $200,000 in November 2011 for the home you want to buy. They put $50,000 down and borrowed $150,000 at 3.96 percent interest on a 30-year loan. The payments, not including insurance, mortgage fees and taxes, are $713 a month.
In November 2014, you decide to buy the home. Mortgage rates have risen to 5.25 percent. If you were to get a new mortgage, your payments on a $150,000 loan would be about $828 a month: $115 more than the seller was paying.
Over the remaining life of the loan, assuming the seller’s lower rate will save you more than $37,000 in interest.
Smaller payments, shorter loan
Assuming the seller’s mortgage accomplishes more than just lower rates. The term is also shorter than it would be with a new mortgage.
The seller’s three years of payments have reduced the mortgage balance to $141,694, and now there are 27 years, not 30, left to pay.
There’s more to it, though. If home values have appreciated, maybe the home now is worth $250,000. If so, you’ll also have to come up with $108,306 in cash: the difference between the $250,000 purchase price and the $141,694 mortgage.
Attractive as it sounds, assuming a mortgage isn’t necessarily easy, or even possible in many cases.
In examples like the one above, some homebuyers will have trouble raising the cash needed. Even if the seller put nothing down, you’ll still need the cash to cover the home’s appreciation.
Then there’s the paperwork. You might think assuming a seller’s mortgage would be just between you and the seller. But you’d be wrong. To assume someone’s mortgage, you need the lender’s permission. That means you’ll have to apply, just as you would for a new mortgage.
Eligible mortgages: VA and FHA
Whether a mortgage is assumable will depend on the specific language in the mortgage documents. Conventional loans will often have language like this:
If all or any part of the Property or any Interest in the Property is sold or transferred without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument.
Note that wording says the lender “may” require immediate payment, not “must” require it. So theoretically, the lender could agree to a mortgage assumption. But most won’t.
But that’s conventional loans. There are two common types of mortgages that are generally assumable: FHA-insured (Federal Housing Administration) mortgages and VA-insured (U.S. Department of Veterans Affairs) mortgages.
Many of these loans can be assumed. And if the buyer qualifies for the loan, the seller is off the hook and not responsible for any subsequent delinquency. Veterans should note, however, that allowing a non-veteran to assume your loan may prevent you from taking out another VA loan until this one is paid off.
To find out about assuming a VA mortgage, call a regional VA loan center. You’ll find phone numbers here. To learn more about assuming an FHA loan, contact the Department of Housing and Urban Development (HUD) here.