The Rise of the Assumable Mortgage: A Path to Homeownership in a High-Rate World?
Did you buy your house during the pandemic years? Congratulations, you likely secured a remarkably low mortgage rate – potentially below 3%, about half of today’s average for a 30-year fixed mortgage. For those who missed that window, the dream of affordable homeownership can feel distant.
But there’s a growing trend offering a potential solution: the assumable mortgage. This allows homebuyers to seize over a seller’s existing mortgage, and crucially, their lower interest rate. It’s a win-win – more affordable homes for buyers, a marketing advantage for sellers, and a potential loosening of the tight housing market.
Millions of Homes Hold the Key
Approximately 6 million homes in the U.S. Have both an assumable mortgage and an interest rate below 5%, according to estimates from Assume List, a company connecting buyers and sellers in these transactions.
However, realizing this potential isn’t straightforward. Not all mortgages qualify, and awareness of this option remains surprisingly low among both buyers and sellers.
Why Aren’t More People Using Assumable Mortgages?
While government-backed mortgages – VA loans (Department of Veterans Affairs) and FHA loans (Federal Housing Administration) – often allow for assumption, many homeowners are unaware of this benefit. Approximately 18% of new mortgages issued in 2020 were VA or FHA loans.
“People just weren’t aware there was an opportunity for them to save literally tens, sometimes hundreds of thousands of dollars,” says Jerry Devlin, founder of Assume Loans.
New companies like Assume Loans and Roam are emerging to facilitate these transfers, using websites and AI to identify assumable mortgage listings. However, hurdles remain.
The Red Tape and Cash Requirement
The assumption process can be lengthy, with mortgage servicers legally required to evaluate a buyer’s credit within 45 days – a timeline often extended in practice. Some servicers may prioritize issuing new loans at higher rates, potentially hindering the transfer process.
“If a lender can get rid of a 2.5% rate and lend money out at 6.5%, I suppose they’d prefer to do that,” says Craig O’Boyle, president of Assumption Solutions.
Perhaps the biggest obstacle is the substantial cash down payment often required. With home prices significantly higher than they were when many of these low-rate mortgages originated, buyers must cover the difference. For example, a home purchased for $500,000 in 2021 might now be valued at $700,000, requiring a $200,000 cash down payment.
Real-Life Success Stories and Challenges
Brendan Burroughs successfully used an assumable mortgage to purchase a Florida duplex with a rate under 3%. He attributes his success to using Assume Loans to expedite the process after facing delays with his original mortgage company.
However, the process isn’t always smooth. Some buyers may encounter resistance from servicers or struggle to secure the necessary cash for a large down payment.
Unlocking the Housing Market: A Potential Solution?
The U.S. Housing turnover rate is near a 25-year low, with many homeowners reluctant to sell and relinquish their low mortgage rates. Experts suggest that increasing the ease and awareness of assumable mortgages could help alleviate this gridlock.
“Long term, the cause of housing unaffordability in the United States is that we don’t have enough housing supply. But you can’t snap your fingers and build 3 million new homes overnight,” says Bharat Ramamurti, a co-author of a recent paper on the topic. “This type of policy gives you a chance of addressing it in the short term.”
Fannie Mae and Freddie Mac are reportedly exploring options to build assumable and portable mortgages more accessible.
FAQ: Assumable Mortgages Explained
- What is an assumable mortgage? It’s a mortgage that allows a buyer to take over the seller’s existing mortgage, including the interest rate and terms.
- What types of mortgages are typically assumable? Primarily VA and FHA loans.
- Is it difficult to assume a mortgage? Yes, it can be. It requires lender approval, a substantial down payment to cover any price difference, and can be a time-consuming process.
- Where can I find homes with assumable mortgages? Websites like Assume List and Roam specialize in listing these properties.
Pro Tip: If you’re a buyer, get pre-approved for a traditional mortgage *and* explore assumable mortgage options. If you’re a seller, check with your lender to see if your mortgage is assumable – it could be a significant selling point.
Wish to learn more about navigating the current housing market? Explore our articles on home buying and retirement and alternative approaches to homeownership.
Have a question about assumable mortgages? Share your thoughts in the comments below!
