When market interest rates climb, escape from those higher rates. Shop for a property that’s already financed with a lower-interest-rate assumable loan. Imagine it’s three years into the future and you want to invest in a home or rental property. Market interest rates are fluctuating between 8.0 and 9.0 percent. You recall those bygone days when 30-year fixed-rate loans were at 5.5 to 6.0 percent. If you could only step into a time machine and return to the past.
Applying for an Assumable Mortgage Loan
When you assume a mortgage, you roll back the clock and take over the mortgage of the seller at the same interest rate the seller is paying—even when that rate sits below the current market. Years ago, nearly all sellers could transfer their low-rate mortgages to their buyers. By the early 1980s, however, many lenders had changed their mortgage contracts to include the notorious “due on sale” clause. This clause gives the lender the right to call a loan due if the borrower sells (or lease-options) the property to a new buyer.
Many people erroneously believe that all assumption possibilities have died. In fact, loan reps rarely tell borrowers about assumptions because assumptions take place between sellers and buyers. You cannot walk into a lender’s office and say, “I’d like one of those low-rate, assumable mortgages that’s going to save me tens of thousands of dollars.” Before you can assume a real estate loan, you must locate a seller who has one.
What Sellers Can Offer Assumable Mortgage Financing?
Generally, sellers who finance their properties with FHA, VA, or some types of adjustable rate mortgages can offer an assumption to their buyers.
Realtor Roger Rodell described his experience with assumables during a past period of high mortgage rates.
Roger said, “I promote low-interest assumable FHA/VA mortgages.
Buyers need to qualify to assume these loans. And some lenders I deal with aren’t eager to push through loan assumptions for a few hundred dollars in transfer fees (compared to the several thousand dollars they earn for new loan originations). But the lower rates and monthly payments make qualifying easier, and the cash savings for buyers are tremendous. If a fairly priced home with a low-interest rate assumable hits the market, I tell my buyers to go for it. Don’t try to pull the sellers down. When there’s a pile of thousand dollar bills sitting in front of you, don’t get greedy and demand an even better deal.
“I’ve worked out the numbers,” Roger continued. “Over a period of five years on a $100,000 loan, as compared to a 9 percent new mortgage, a 7 percent assumable will save you $8,400 in interest. Over 10 years, the savings are nearly $17,000; over 25 years, you’ll keep an extra $42,000.
And those numbers don’t include the $2,000 to $4,000 that an assumable might save you in points, origination fees, appraisal, and closing costs.
“Or here’s another way to figure it,” explained Roger. “Let’s say your low-interest assumable saves you $135 a month over the amount you’d pay with new financing. If you bank those savings every month in an IRA or 401(k) plan that earns a return of just 6 percent a year, after 25 years your accumulated savings with interest will amount to $93,200. Now you can see why I refer to a good low-interest assumable as a pile of thousand dollar bills.”
Short-Term Strategies Toward Assumable Mortgage Loan
In some situations, you might gain by assuming a mortgage that carries a higher-than-market interest rate. Say, current rates hover around 6.5 percent and you’re negotiating with a seller whose assumable mortgage shows a rate of 7.5 percent. Not worth assuming? Don’t jump to that conclusion. Assumptions usually cost less in terms of time, effort, and cash-to-close than new mortgage originations; therefore, this higher rate, 7.5 percent assumption could prove profitable under short-term strategies such as the following:
– You plan to own the property for only a year or two.
– Inflation has dropped and interest rates seem sure to fall further. You want to time your new mortgage to coincide with the market bottom that you foresee.
– You plan to improve the property to increase its value. Then, you’d like to get a new loan based on this higher improved value.
– Your borrower profile displays some warts. New financing at the lowest rates available could prove iffy. To qualify for the assumption probably won’t require the same exacting standards. One or two years of perfect payments could set you up to then qualify for a refinance as an “A” borrower.
How to Find Assumable Mortgage Loans
Millions of outstanding FHA/VA loans (fixed-rate and adjustable) permit assumptions. In addition, most conventional (Fannie/Freddie) and portfolio lenders will allow sellers to transfer their adjustable-rate loans to buyers. Also, many investor mortgages on larger apartment, office, and retail properties permit assumptions by buyers. To find assumable loans requires you to ask and investigate. Sellers (or their realty agents) may not know or publicize this fact. On the other hand, when interest rates shoot up, the search for assumables becomes intense. Savvy sellers and agents then tout their assumables to favorably distinguish their properties from others that require buyers to obtain costly new loans.
Lower Rate Assumable ARMs
Nearly all adjustable-rate mortgages include lifetime rate caps. No matter how high market interest rates climb,ARM borrowers know that their loan rate will max out at, say, 8, 9, 10, or 12 percent. Consequently, in periods of extraordinarily high rates, you can find ARMs that are maxed out—or close to maxed out—yet still sit below the going rates for new 30-year, fixed-rate mortgages. In that case, your (assumable) ARM rate can’t go up much, but it can go down.