Image: Ekaterina Senyutina / Adobestock
In a market where mortgage rates are surging, potential homebuyers face a daunting challenge. With the national average for a 30-year fixed-rate mortgage standing at 7.5%, some buyers and sellers are asking about other solutions, such as assumable mortgages.
What Is an Assumable Mortgage?
An assumable mortgage allows the buyer to step into the seller’s financial arrangement, taking over their existing mortgage instead of securing a new one. This means inheriting the seller’s original loan terms, including the interest rate.
Eligibility and Considerations
Unfortunately, most conventional mortgages cannot be assumed, but there are some exceptions. Adjustable-rate mortgages can be assumed outside their fixed period. However, government-backed loans like VA, FHA, and USDA loans are typically assumable, contingent on lender approval. It’s worth noting that lenders may not be inclined to approve an assumed mortgage.
Does It Actually Save Money?
The advantages of an assumable mortgage in a high-interest rate environment are tied to the existing mortgage balance or home equity. For instance, if a home is priced at $450,000 and the seller’s mortgage balance is $300,000, you’ll assume the existing mortgage balance and you’ll need a payment of $150,000 to cover the difference.
Applying for a Second Mortgage
If you don’t have cash to cover the difference, you’ll need to get a second mortgage. Depending on your credit profile and current rates, the interest rate could be much higher than the assumed loan.
In most cases, an assumed mortgage isn’t realistic, but there are always exceptions. The ideal scenario for an assumed mortgage is a fairly recent purchase with a low-interest rate, where the price of the home isn’t significantly more than the loan.
