Hitting The Interest Rate Jackpot: Balancing The Benefits Of An Assumable Mortgage

By ERIN FLYNN JAY

Buyers who are sensitive to high mortgage rates have developed an interest in assumable mortgages, betting they are the ticket to avoiding excessive costs, but are they worth the hype?

An assumable mortgage lets a homebuyer take over the seller’s existing mortgage, including its terms and interest rate. It’s like adopting a well-behaved financial pet instead of getting a new, potentially unruly one, said Ritika Asrani, founder and head broker at St Maarten Real Estate.

“While you can’t literally time travel to snag a rate from a decade ago, assumable mortgages allow you to benefit from historically low rates,” said Asrani. “If the seller locked in a killer rate back then, and rates have risen since, assuming that mortgage could be like hitting the interest rate jackpot.”

Asrani said that assuming a lower-rate mortgage can save buyers a fortune. Closing costs are also often lower than getting a new mortgage.

Finding a deal that works is a bit like searching for a unicorn because most conventional mortgages are not assumable. Loans insured by the Federal Housing Administration or backed by the Department of Veteran Affairs or the United States Department of Agriculture are, as long as specific requirements are met.

To unearth the best assumable mortgage deal, channel your inner detective, Asrani said.

“Network with real estate agents, scour online listings, and tap into your social circles,” Asrani said. “Sometimes, the best opportunities are whispered about in the least expected places.”

When are assumable mortgages used?

Neil Anders, host of the Emmy-nominated television program “Financing the American Dream” on CNBC and Bloomberg, said assumable mortgages are typically used in sales between family members, by law (devise, decent, divorce, etc.), or when a seller agrees to allow a buyer to assume their current mortgage.

Any borrower(s) whose credit, income, and assets allow them to qualify for the mortgage when applying the government agency’s manual underwriting and servicer/holder loan assumption requirements is eligible for a mortgage assumption.

“The current borrower must contact their loan servicer or holder, state their intention to have their loan assumed, and work with the proposed borrower to submit the documentation required for the assumption to be reviewed,” said Anders.

According to Anders, there are pros and cons of loan assumptions.

Pros:

Potentially lower than market interest rate offered to the assuming borrower(s)
More attractive listing for the seller
Limited closing costs
No appraisal

Cons:

Borrowers must bring in the difference of the balance of the current loan and the agreed-upon sale price. Some of this may be obtained in the form of a second mortgage, but would be subject to the government agency, existing lender, and proposed (second lien) lender’s guidelines.
AUS approval is not allowed. All assumptions must be manually underwritten.
Assuming borrowers must work with the current loan holder or servicer.
Sellers can still be potentially liable for the debt.

Garrett Ham, principal broker and CEO at Weekender Management, Inc., said typically everything about the existing mortgage stays the same, except that the borrower who is named on the mortgage changes.

Ham agrees with Anders that the obvious pro right now is the ability to take over a mortgage with a significantly lower interest rate. The major con is that the buyer has to come up with the difference between the mortgage balance and the sales price.

“That means that the buyer has either to come up with a lot of cash or take a second mortgage on less favorable terms,” Ham said.

There are circumstances, however, where that is not the case. Ham said assumable mortgages work well in pre-foreclosure situations where a seller is willing to let the property go for the mortgage balance only.

In cases where buyers or sellers have questions about assumable mortgages, it is advised that they consult with a real estate attorney.