Is an assumable mortgage worth it now?
Shopping for a mortgage right now can be a headache for potential homebuyers. Everywhere you look, you find mortgage rates that are higher than they were just a few years ago, with the national average sitting at 8.04% for a 30-year fixed-rate mortgage. With inflation still higher than the government's target, there is a chance that the Federal Reserve could hike federal interest rates again this year, which could send mortgage rates even higher.
The rates are high enough that many people who might otherwise be in the market to purchase a home could consider waiting it out and staying in their current one or on the rental market for a few more years. There is another option out there to consider, though – an assumable mortgage. This option takes a bit of know-how, but it might be worth considering, especially right now.
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Is an assumable mortgage worth it right now?
First off, let's define what an assumable mortgage is. Essentially, the way it works is that rather than getting a mortgage from your own lender to buy a home, you simply take over the seller's mortgage. This means that if the home's current owner has a mortgage with a 2% interest rate (presumably gotten at a time when mortgage rates were significantly lower than they are now), you get to take over the loan with that rate rather than taking out a new loan.
If you can find an assumable mortgage that works for you, it absolutely could make sense financially right now. The reason why is fairly simple – you just won't end up paying as much in interest as you would if you took out a brand new loan right now.
That said, there are some costs associated with assumable mortgages that don't come with getting a new loan. For instance, if you assume a mortgage that originated as a VA Loan (a special loan backed by the government designed for veterans of the armed services), you'll have to pay a funding fee, which is generally 0.5% of the remaining value of the mortgage.
Make sure you do the math and that you are actually saving money when you consider an assumable mortgage.
"We are seeing a lot of interest around assumptions taking off," said Raunaq Singh, Founder & CEO of Roam, a digital platform that helps connect potential buyers with assumable mortgages.
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Are all mortgages assumable?
No, not all mortgages are assumable. Most conventional mortgages, for example, cannot be assumed – unless certain conditions are met. For instance, an adjustable rate mortgage is assumable after the initial fixed period has past.
Loans originated as part of a government program are generally assumable. This includes VA loans, Federal Housing Administration (FHA) loans and United States Department of Agriculture (USDA) loans.
It is worth noting that you do still need approval from the lender in order to assume a mortgage, so you'll still need to make sure you're an attractive borrower before you start to consider looking for an assumable mortgage.
The bottom line
With mortgage rates currently soaring, it is understandable why some potential buyers are discouraged or even considering putting off buying a home. One option they should consider, though, is an assumable mortgage. By taking on an existing loan rather than taking out a new one, buyers can get the lower rates that were available in years past.
