Nov 10, 2024
Like many prospective homebuyers, Wes Van Dell and his wife spent two years looking for a home in North Dakota without success.
"We really just hadn’t had much luck, mainly due to increasing interest rates driving up the cost of our mortgage," Van Dell told CNBC.
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Although the couple put in several offers, they weren't successful because the housing market was so competitive.
Everything changed, though, when they found a property that, despite still being outside of their budget, had something called an assumable mortgage. Although the couple didn't understand this initially, they discovered assumable mortgages provide a unique opportunity to get a mortgage at a far lower rate.
Assumable mortgages are rare, and there are a few catches to be aware of, but they can often work very well for buyers in the right circumstances. Here's what happened to the Van Dells, and how you can decide whether an assumable mortgage could work for you.
What is an assumable mortgage?
Most home mortgages in the United States have a "due on sale" clause. This means the mortgage holder must pay any remaining loan balance when they sell their home. They'll pay off their loan from the sale proceeds, and the buyer will get their own new mortgage.
Some mortgages, however, are assumable, which means that the current mortgage terms can be transferred to the buyer. While conventional mortgage lenders generally don't offer this option, loans backed by the government — including FHA, USDA and VA loans — sometimes make this possible if you meet certain requirements or get lender approval.
Assumable mortgages weren't a big selling point when mortgage rates were relatively low. However, with today's average fixed rate of 6.79%, an assumable mortgage may be much more affordable than a conventional mortgage. In fact, the mortgage the Van Dells assumed came with a rate of just 2.6%, saving them over $800 a month.
Since these loans can save borrowers a fortune, it's unsurprising that interest in assumable mortgages has increased in this high-rate environment. In 2023, 4,052 FHA mortgages were assumed, a 59% increase compared to 2021, while VA loans saw a 713% increase in mortgage assumptions in the same timeframe.
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Pros and cons of assumable mortgages
For the Van Dells, the assumable mortgage made their home purchase possible when it wouldn't have been otherwise. Many other borrowers could have a similar experience.
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Between 2012 and 2021, the average 30-year fixed rate mortgage stayed below 5%. Many homebuyers would love to get loans at those rates today.
However, despite their obvious benefits, assumable mortgages have some downsides. The first and most obvious is that they are only available on a limited number of homes, so if you're interested in one, you'd have to find a property offering it. This would severely limit your selection.
You'll also have to deal with a lot more paperwork than a traditional mortgage, and your loan could take much longer to close. The Van Dells said it took around 90 days, but not all sellers can wait that long.
There's also another huge obstacle that many people will struggle to overcome. To assume the mortgage, buyers must pay the seller all the home equity.
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So, for example, if a seller still owed $300,000 on their $400,000 mortgage, the buyer would have to pay the $100,000 that’s already been invested in the home, plus whatever additional money the appreciated sale price adds on to the original mortgage. So if the home was sold for $450,000, the buyer would have to cover that extra $50,000, too.
This was possible for the Van Dells because the amount that was required upfront was close to a 20% down payment, which is what they budgeted for.
But, if you're assuming a mortgage that has mostly been paid off or if the property has gone up in value a lot since the seller bought it, the down payment required will be much higher. Taking out a second mortgage is an option, but you'd have to qualify, pay closing costs and a higher interest rate.
The bottom line is that assumable mortgages may be an option if you find a home offering one, the sellers are willing to work with you and you can come up with the difference.
Outside of these situations, your best bet for an affordable home loan is to shop around as much as possible, ensure your finances are solid and accept that you'll pay a higher rate now than in the previous years.
Remember, if rates fall in the future, you can always refinance. As long as your home payments are affordable today, there's little downside to moving forward on buying a property you love — even if an assumable mortgage isn't in the cards.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
