Assumable mortgage is increasingly attractive for both buyers and sellers

In September 2022, 85% of U.S. homeowners with mortgages had an interest rate below the (then) current rate of 6%, according to Redfin. It's speculated that a desire to hold onto a cheaper rate affected sales listings. July 2023 witnessed a 29% decrease in house listings nationwide according to Zillow. Zillow also speculated that the "persistence of elevated mortgage rates" will continue to limit sales in the last quarter of 2023.

But, if you’re looking to move and to somehow keep a lower interest rate, there is a way: an assumable mortgage.

What is an assumable mortgage?

Like the name suggests, an assumable mortgage allows you to assume an existing mortgage, and that includes the rate. So if you want to buy a house from a seller who has a 4% interest rate, you could buy the house, assume the amount that is still owing on the mortgage and keep that 4% rate.

Sounds pretty good, right? Especially right now.

“If you think about the perspective of a buyer, when rates are low, people are less interested in exploring the possibility of an assumable mortgage if they don't really need to,” said Danielle Hale, chief economist at Realtor.com.

“But now that rates are much higher than they have been, there's a strong incentive for buyers to consider that as a possibility. And for sellers who have a loan that's assumable, to potentially advertise that.”

Types of mortgages that can be assumed

It’s important to note that not all mortgages are assumable. Loans that are backed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA) can be assumable as long as you meet the requirements.

And those who deal with loans backed by the VA say they’re becoming more popular.

“We’re seeing more interest in VA loan assumability as interest rates continue to climb,” said Chris Birk, director of education for Veterans United Home Loans in an email. “Years of historically low rates curbed demand for this under-the-radar benefit of VA loans.”

Pros of an assumable mortgage

There can be a lot of advantages to an assumable mortgage, especially right now.

“During a time of rising interest rates, the benefit of an assumable mortgage is the ability to get a new home and keep the low rate the homeowner locked into months or years prior,” said Birk. “You’re basically taking over someone else’s mortgage loan, including the same principal and interest payment.”

If you’re selling, advertising your home with an assumable mortgage can also make it easier to sell, as lower interest rates are very attractive to buyers worried about the state of the market.

Plus, there tends to be fewer closing costs associated with assumable mortgages. According to the FHA, many of the costs associated with closing can be included in the loan — although you can always pay them out of pocket if you choose to.

Cons of an assumable mortgage

However, there are some drawbacks you should be aware of and one of them is that if you’re buying, it could cost you a lot of money upfront.

If you’re looking to buy a house with a price of $500,000 but the loan that you would assume on the house is only $350,000, you’ll have to make up that $150,000 difference, either with a second mortgage, which can be complicated, or with cash.

“You’ll need cash or secondary financing to pay out the homeowner’s equity,” says Birk. “Finding secondary financing can be a challenge. Also, not all VA lenders and servicers allow for assumptions.”

While sellers could potentially make more money off the sale of an assumable mortgage since a lower interest rate might allow them to sell at a higher price, it can also be more tricky.

“You'll have to work with a lender too, regarding whatever the process is for getting that mortgage assumed, if it's even available,” says Hale.

For instance, there are particular rules when it comes to assuming a VA mortgage that can have significant consequences if they aren’t followed.

“There’s also a significant potential drawback to assumptions for the veteran homeowner,” says Birk. “Whatever VA loan entitlement the veteran is using on their current home stays tied up in the property until their original loan is repaid in full. The only way to unlock it in an assumption transaction is for the assumer to be a veteran who is willing to substitute their entitlement for the homeowner’s.”

And if that doesn’t happen, then the veteran's VA benefits may be reduced.