What to know about assumable mortgages with rising interest rates
Ready to buy a new home, but feeling trapped in your current home?
It costs more to finance a home purchase now than it did not long ago, so you might want to buy but feel stuck because today’s rising lending rates can’t. not compare to the extremely low rate you get on your current mortgage.
Call your grandparents and let them tell you about affordable mortgages. Finding one with a low rate, and assuming that, might be the answer, though the difference might not be big enough – yet? — to bring hypotheses out of the dark.
An Assumable Mortgage, if approved by a lender, allows a buyer to buy out a seller’s equity and assume the interest rate, repayment schedule, principal balance and other terms of the mortgage. seller’s mortgage.
Conventional mortgages are generally not insurable, but government-backed loans are, such as those insured by the Federal Housing Administration, the Department of Veterans Affairs, and the US Department of Agriculture.
“The last time we saw a significant number of assumptions was in the late 1970s and early 1980s, when interest rates were at 50-year highs,” David said. Chapman, chairman of the Oklahoma Real Estate Commission.
The point of assumption is to take back a loan at its original interest rate to avoid a new loan with a higher rate. The gap between the two was wide a few generations ago.
“As an example, rates in 1965 were below 6% and in 1980 the average mortgage rate was almost 15%,” said Chapman, an investor, real estate broker, developer and professor of finance at the University. of Central Oklahoma.
An assumable mortgage “makes the property much more valuable,” he said. “Properties at that time without assumable loan availability were actually worth less because they cost the buyer more.”
Assumable loans aren’t quite in the news anymore, but they’ve gotten a bit of renewed attention with recent rate hikes. Real estate agents go out to meet alumni to learn, or relearn, about them, and review documents that have not been used for years.
How do you know if a house you want to buy has an assumable mortgage? How do you as a seller let potential buyers know you have one? It’s quite easy.
“If you’re a seller, mention it. If you’re buying a house, ask if it’s assumable,” mortgage investor and blogger Colin Robertson wrote in a recent post.
The title of the post tells the story: “Assumable mortgages: a little-known tool you can use now that interest rates have risen.” It’s been so long since assumable mortgages have been part of the daily mix of mortgages, because rates have been so low for so long,
“The assumable mortgage hasn’t been on anyone’s radar for the past two decades because mortgage rates have been steadily falling,” Robertson wrote. “But now that they’re going higher and higher, you’ll probably hear more about them.
“You just have to know the many pitfalls and drawbacks involved.”
Note: The sudden rise in rates has stalled in the face of inflation and the growing possibility of a recession, according to Freddie Mac.
The average rate on the traditional 30-year fixed-rate loan was 5.7% this week, down from 5.81% last week, Freddie Mac reported. Rates averaged below 3% for most of 2020 and 2021.
Advantages, disadvantages of assumable mortgages
Bankrate.com, the personal finance website, lists these pros and cons of assumable mortgages in an article by Zach Wichter.
• Pro for buyersin addition to a higher than prevailing interest rate: “An appraisal is generally not required when taking on a mortgage, which can make it easier to close the deal and save money for the buyer the appraisal fees, which can amount to several hundred dollars.”
But an expertise is always recommended, to avoid overpaying.
• Disadvantage for buyers: “You are limited to the current lender. If you wish to take on a mortgage, you must still apply for the loan and meet all of the lender’s requirements as if it were a new loan. Without the lender’s consent, taking Support cannot This restriction limits your choice of lender to Seller’s Loan Manager.
• Another downside for buyers: “If the seller has a lot of equity, you may need to put down a big deposit.”
• Pro for sellers: “Your home may be more attractive to buyers. If you are the seller with little equity and your current mortgage has a low rate, your home may be more attractive to a buyer.”
• Con for sellers: “You could still be responsible for the debt. As a seller, if the buyer doesn’t make the payments, your credit could potentially be negatively affected,” for example, if the lender doesn’t release the original borrower from his liability, and that the default of the new borrower.
Chapman had a few other considerations.
A buyer who takes on a mortgage might be able to “afford more house” since the cost of borrowing is lower than prevailing rates and closing costs may also be slightly lower, he said. .
Other downsides: The buyer will likely need to take out a second mortgage to buy the seller’s equity, and second mortgages “can be complicated and harder to qualify,” Chapman said.
Additionally, with FHA-backed loans, a mortgage insurance premium is required for the term of the loan.
Here is the loss of purchasing power due to rising mortgage interest rates
Chapman gave an example of the loss of purchasing power that accompanies higher rates:
Not too long ago, a buyer with an FHA-backed fixed-rate mortgage and the required down payment (for FHA) of 3.5% could have borrowed money at about 3% off. interest and have a monthly payment of $894, not including taxes and insurance. .
“Now with the recent rate increases, that buyer can get a loan at about 6% and that same payment would increase to over $1,200 a month. The payment goes up, but it also changes the quality of the house that the buyer will be able to buy or afford to buy,” he said.
Chapman offered two observations, one for all of us and one just for investors.
For all of us:
“Always remember that interest rates are still very good. Yes, I get it, it’s all relative and they were unreasonably low for a long time and now look high,” he said. “Buyers should compare the costs of buying a home and renting a home.
“Home rentals are also increasing. It’s an easy comparison, and they’re likely to find owning a home still a pretty good option, especially considering the benefits of owning a property during downturns. inflation. Real estate is absolutely the best hedge against inflation.”
For real estate investors:
“I’ve had my best years in higher interest rate environments,” Chapman said. “For me, it’s about the price of the house. I can always refinance in the future, but I can never change the amount I’m paying for the property, and I know I have to pay a lot more for the properties. in low interest rate environments than in high interest rate environments.”
Your mileage may vary, as they say. For informational purposes only, as they say. Does not constitute financial advice, as they say. No legal advice either.
When it comes to assumable mortgages, consult an expert and don’t assume anything.
Senior Business Writer Richard Mize has covered housing, construction, commercial real estate and related topics for the newspaper and Oklahoman.com since 1999. Contact him at [email protected]