Aug 1, 2024
A number of factors make it difficult to buy your dream home these days, including low inventory, elevated prices and expensive mortgage rates. And these are all interrelated.
In June 2024, the U.S. median existing-home sale price rose 4.1% from a year prior to $426,900, according to the National Associations of Realtors, marking the twelfth consecutive month of annual home price increases.
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Meanwhile, the unsold housing inventory had risen to a 4.1-month supply at the current monthly sales pace as of the end of June. Experts consider a balanced market to include four to six months of inventory, per Forbes Advisor.
But basic economics tells us that when a given commodity is in short supply, its price tends to rise — considering inventory is on the low end, this may explain the home price gains. One reason inventory is so low could be that elevated mortgage rates are keeping buyers in their homes and zapping their motivation to sell. After all, who would want to potentially swap a 3% or 4% mortgage with a 7% loan, which is roughly what buyers are looking at today?
Thanks to an assumable mortgage, though, you may not have to get stuck paying an exorbitant rate. But while there are benefits to getting an assumable mortgage, there are some drawbacks to consider as well.
What is an assumable mortgage?
With an assumable mortgage, you take over the existing mortgage on a home you're buying. The terms of the existing loan stay the same once you take it over, which means you're looking at the same monthly payments as the borrower who originally signed that loan.
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What are the benefits of an assumable mortgage?
The primary benefit of an assumable mortgage is that you might pay a much lower interest rate than you would taking out a new mortgage based on current borrowing conditions.
As of Aug. 1, the average 30-year fixed mortgage rate was 6.73%, according to the Federal Reserve Bank of St. Louis. At roughly the same time three years ago, it was 2.77%. And on the same date in 2019, before the pandemic fueled a steep decline in mortgage rates, the average rate was 3.75%.
A lower interest rate on a mortgage could result in significantly lower monthly payments. So, if an assumable mortgage is an option for you, it could spare you from today’s hefty borrowing costs.
Plus, with an assumable mortgage, you’re paying off the remainder of someone else’s loan. This could mean having a shorter repayment period than you would with a brand-new mortgage, allowing you to own your home outright and be debt-free sooner.
What are the drawbacks of an assumable mortgage?
With an assumable mortgage, you might end up with a lower interest rate on your loan than what you'd get today. But that doesn't mean you'll get a lower purchase price.
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Home values have risen dramatically over the past number of years. In the second quarter of 2019, the median U.S. home sale price was $322,500, per the St. Louis Fed. During the second quarter of 2024, it rose to $412,300. If you take over an assumable mortgage, you might need a huge down payment to cover the difference between what a home is being sold for and the amount left on its existing loan.
For example, say you’re taking over an assumable mortgage with a 3.75% interest rate. That’s a better rate than what you can get today. But back then, your home may have cost $300,000 and the borrower may have taken out a $240,000 loan on it. If they’re now selling their house for $400,000, and there’s $210,000 left on the mortgage, you have to come up with the difference.
If the gap can’t be filled, however, you may have to take out another mortgage on the remaining balance, and that could result in a less favorable rate on the second mortgage. Paying off two mortgages at once can also be a hassle while increasing the risk of default.
Also, not every mortgage type is assumable. Generally, you can only get an assumable mortgage for a government-backed loan, including FHA loans, VA loans and USDA loans. But even if it works out that the home you're buying has one of these loans, you might still hit a snag.
With an FHA loan, you may have to assume not just the mortgage, but the ongoing mortgage insurance premiums that come with it. With a VA loan, you don't have to be a member of the military to assume the loan, but the seller may be incentivised to sell to a qualified military borrower instead. And with a USDA loan, you may not meet the income requirements for the loan in question.
It’s also worth noting that while FHA, USDA and VA loans allow assumptions, it must be approved by the lender. It’s also not a given that you’ll be able to take over one of these loans even if you meet the requirements. So, while an assumable mortgage might seem like a good option for you, the process of getting one may be complicated. It’s a good idea to weigh the pros and cons of an assumable mortgage before committing to one.
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Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
