Homebuyers, Guides

Homebuyers Can Lock in Super-Low Rates with Assumable Loans. Are They Worth the Risks?

While a 2% mortgage rate may feel like a distant dream, some buyers in 2024 are pulling it off. No, this isn't magic. It's called an assumable mortgage.

Assumable mortgages are on the minds of more buyers these days as mortgage rates hover around 7%.

These loans allow today's buyers to lock in the seller's interest rate. If the seller had a 3% rate, that could save buyers hundreds if not thousands, of dollars every month on their mortgage payments. That's because buyers seeking an assumable mortgage are essentially taking over the seller's existing mortgage—as well as the seller's potentially lower rates.

"You're essentially buying the mortgage," said Devyn Bachman, chief operating officer of John Burns Research & Consulting, a real estate firm. 

However, buyers shouldn't get too excited. These mortgages aren't easy to find. Less than a quarter of all loans can be assumed. Eligible loans generally require the buyer to purchase the seller's equity to take over the loan. That can be prohibitively more expensive than taking out a new loan. 

There are downsides for sellers as well. If the buyer doesn't make their monthly mortgage payments, the seller could also be liable—even though the seller no longer owns the home.

"Homeownership is not a one-size-fits-all journey," said New American Funding Loan Officer Monique Sanchez. She is based in Santa Ana, CA. "By exploring options like mortgage assumption, you can tailor your financial strategy to fit your unique needs and goals."

How does an assumable mortgage work?

An assumable mortgage allows the buyer to take over the seller's existing home loan instead of applying for a new one. The mortgage balance, interest rate, and repayment schedule all carry over to the buyer.

However, only Federal Housing Administration (FHA) loans, U.S. Department of Agriculture (USDA) loans, and U.S. Department of Veterans Affairs (VA) loans can qualify.

Conventional mortgages cannot be assumed.

Only about 23% of all loans, totaling about 12.2 million mortgages, are assumable, according to the data and technology firm Intercontinental Exchange.

However, many loans that could be assumed don't offer buyers the super-low rates they desire. Less than half of loans that could be assumed have rates below 4%.

Homeowners who have mortgages with lower rates may not want to sell and give up their rates. They may also be reluctant to take on the risks of the loans.

In addition, an assumable mortgage isn't just an agreement between a buyer and seller. The homebuyer will still need to meet the lender's qualification standards before assuming a mortgage.

This means that a buyer's credit history, income, credit score, debt-to-income ratio (DTI), and other financial information will determine approval.

The benefits of an assumable mortgage

Aside from the obvious benefit of potentially locking in a low interest rate that can save a buyer thousands of dollars over the life of a loan, assumable mortgages offer several other cost-saving perks.

Generally, appraisal costs and other upfront closing costs are waived with assumed loans.

Buyers also generally enjoy shorter loan terms because the initial years of the loan have already been paid by the seller.

The downsides of an assumable mortgage

While an assumable mortgage may save buyers money every month, it could cost them quite a bit upfront.

Generally, buyers are required to pay the seller for the equity they've accumulated in a home. That includes what the seller has already paid off on their home as well as the property's appreciation.

For example, a seller may have purchased a home with a $300,000 mortgage, locking in a 3% rate. The seller paid $100,000 off their mortgage and then listed the home for $400,000.

A buyer who wanted to assume the seller's loan would owe the seller $200,000 at closing. Many first-time buyers don't have that kind of money.

"There is so much home equity that has bubbled up over the last few years that it makes an assumable mortgage really difficult,” said Bachman. "It's cost ineffective a lot of times because it's a lot of money you have to fork over.”

In some cases, assumable mortgages also come with extra costs they wouldn't face if they were obtaining a new mortgage.

A buyer who gets an assumable VA loan could need to pay a funding fee that could total 0.5% of the remaining mortgage value.

Meanwhile, a buyer with an assumable FHA loan could end up paying a mortgage insurance premium (MIP) that may have otherwise been avoided.

The risks of assumable mortgages for sellers

Sellers are often apprehensive to agree to an assumable mortgage because they could be legally and financially responsible if the buyer defaults on the loan. Their credit scores could be affected.

Assumable VA mortgages have their complications.

While a buyer doesn't need to be a veteran to assume a VA loan, the seller would have to deal with the hassle of having their VA entitlement tied up for as long as the buyer keeps the loan.

That could make it difficult for them to purchase a new home with no money down through the VA loan program.

Should buyers look for assumable mortgages?

An assumable mortgage can feel like a hack to get a low interest rate. However, buyers who are planning to pursue this option need to understand that assumable mortgages come with their hurdles and risks.

"Your monthly payment would be a lot lower than it would be at today's rates," said Bachman. "But you would need to put a bunch more cash into the house to do that."

^{Monique Sanchez (NMLS# 694900)}