Why Assumable Mortgages Are Gaining In Popularity
People always need a place to live. Regardless of where the market stands, many people still want to purchase a home. There are plenty of reasons, not the least of which is security and the right to make it your own in the sense of comfort and design. However, the market is continuing to degrade in the wake of the pandemic.
The Federal Reserve continued to increase interest rates through the year 2022. Increased mortgage rates make purchasing a house much more difficult, leading people to find better options. Assumable mortgages have gained popularity because they get around the rocketing interest rates.
What Is An Assumable Mortgage?
A mortgage is basically a term used for a loan taken out on a home. If you buy a house and take out a loan to cover the cost, it is a mortgage. An assumable mortgage has a special clause allowing another buyer to essentially buy the house and mortgage from you with its locked-in rate.
So, if someone bought a house with a mortgage at 4% interest, it is better than buying a new house with a 7% interest rate. You can buy the house from that person and take on their 4% interest rate mortgage. It becomes your burden. But not all mortgages are assumable.
Which Loans Are Assumable?
Not all lenders are created equal, and neither are their loans. Typically, the assumable loans you will find are government loans. These are loans from the Federal Housing Administration (FHA), the U.S. Department of Veteran Affairs (VA), and the U.S. Department of Agriculture (USDA). Most conventional loans will not be assumable because they do not have unique backing from the government.
If you may want to sell your house in such a fashion in the future, make sure to check with your lender prior to taking out a mortgage. In some special cases, conventional loans may be assumable. You will be able to find a clause in the contract discussing the ability for it to be assumed if this is the case.
What to Know About Assumable Mortgages
The reason these mortgages are gaining popularity is because of the current state of the housing market. With interest rates high, people want to lock in better rates on their houses. Of course, if they were always a great choice, then everyone would aim for an assumable mortgage first.
One drawback of these loans is they come with steep upfront costs. To buy a house and a loan from someone, you must cover the cost of the loan that has been paid back to the lender. So, if the house was $500,000 and the owners only owe $300,000 on their loan, you have to pay the $200,000 difference in cash.
Taking out a second mortgage to cover the cost is another possible option. However, this process is complicated. Many lenders will not allow you to take out a second mortgage unless you provide sufficient proof of ability to pay it back. This may not be possible for many.
For those looking to sell, an assumable loan could sweeten the deal. However, a VA loan can be tricky to deal with. While getting offers on the house may be easier, a VA loan is tied to your entitlement benefits. Unless the buyer is also a veteran willing to take the entitlement burden, you could be stuck, unable to utilize that benefit until the assumer pays off the VA loan.