Why homebuyers are opting for assumable mortgages despite higher down payments and lender hesitancy

In the ever-changing landscape of the housing market, one type of loan is gaining traction among homebuyers: the assumable mortgage. This financing option allows buyers to take over the seller’s existing mortgage, including its interest rate and repayment terms. With mortgage rates currently high, assumable mortgages offer a rare opportunity to lock in lower rates. However, they come with significant caveats, including higher down payments and lender reluctance.

Assumable mortgages are not new, but they are becoming more popular as interest rates rise. These loans are primarily available through government-backed programs such as the Federal Housing Administration (FHA), Veterans Affairs (VA), and the United States Department of Agriculture (USDA). The number of FHA and VA loans assumed by new buyers increased significantly in 2023 and is expected to double in 2024.

Hannah Jones, a senior analyst at Realtor.com, explains, "An assumable mortgage may be especially appealing to buyers as these loans effectively pass a homeowner's current low-rate mortgage to the buyer". This can result in substantial savings over the life of the loan.

Advantages of Assumable Mortgages

Lower Interest Rates: One of the most significant advantages of assumable mortgages is the ability to secure a lower interest rate than what is currently available in the market. This can lead to significant savings in interest payments.

Easier Qualification: Buyers may find it easier to qualify for an assumable mortgage compared to a new loan, especially if they have a lower credit score.

Lower Closing Costs: Since the buyer is taking over an existing mortgage, they may save on closing costs such as appraisals and title insurance.

Challenges and Drawbacks

Higher Down Payments: One of the biggest drawbacks is the requirement for a higher down payment. This is because the buyer must cover the difference between the home's sale price and the remaining balance on the mortgage. For example, if a home is valued at $300,000 and the existing mortgage balance is $200,000, the buyer must come up with $100,000 in cash or secure a second loan.

Lender Reluctance: Many lenders are hesitant to offer assumable mortgages because they do not benefit from the transaction. Additionally, some lenders may not fully understand how these loans work, leading to further reluctance.

Limited Availability: Only a quarter of mortgages in the U.S. are assumable, primarily those backed by FHA, VA, and USDA programs.

Real-World Examples

Consider the case of Jane and John Doe, who purchased a home with an assumable mortgage. The home's value was $350,000, and the existing mortgage balance was $250,000. They had to make a down payment of $100,000, which they covered by liquidating some investments. Despite the high upfront cost, they secured an interest rate that was 2% lower than the current market rate, saving them thousands of dollars over the loan's term.

Expert Opinions

Real estate experts emphasize the strategic advantage of assumable mortgages in a high-interest-rate environment. "With mortgage rates expected to remain above 6% for the foreseeable future, assumable mortgages offer a unique opportunity for buyers to secure lower rates," notes Lawrence Yun, chief economist at the National Association of Realtors.

However, experts also caution about the complexities involved. "Buyers need to be aware of the higher down payments and potential difficulties in dealing with lenders who may not be familiar with assumable mortgages," says Keith Gumbinger, vice president at HSH.com.

Future Outlook

The popularity of assumable mortgages is expected to grow as interest rates remain high. According to government data, the number of assumable mortgages is on track to more than double in 2024. This trend indicates a growing awareness and acceptance of this financing option among homebuyers.

However, the market for assumable mortgages is still relatively small. As more buyers and sellers become educated about the benefits and challenges, we may see an increase in the availability and acceptance of these loans.

Assumable mortgages offer a compelling option for homebuyers looking to secure lower interest rates in a high-rate environment. While they come with challenges such as higher down payments and lender reluctance, the potential savings can make them an attractive choice. As the housing market continues to evolve, assumable mortgages may become an increasingly important tool for savvy buyers.