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Does an assumable mortgage make sense in today's rate environment?

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Experts say an assumable mortgage could make sense in today's high-rate environment, but it won't be the right solution for every buyer. Yevhenii Kazykin/Getty Images

After 11 benchmark rate hikes throughout 2022 and 2023, the Federal Reserve has opted to keep rates paused at a 23-year high this year to continue the battle against inflation. As a result, today's mortgage rates remain high compared to the lows we saw during the pandemic. Average 30-year mortgage loan rates are over 7%, over twice as high as they were just a few years ago.

Today's high mortgage loan rates have led some potential homebuyers to wait for rates to drop in the future instead of buying now and facing higher monthly payments. But while the Fed was at one point expected to start lowering rates at some point in mid-2024, it's unclear whether that will happen now that inflation remains higher than it should be.

So if you're one of the potential homebuyers who's been waiting for good news on the mortgage rates front, you could be waiting a while longer. But you should know that taking out a traditional mortgage isn't the only way to achieve your goal of homeownership. Another option you may have is an assumable mortgage loan, which involves transferring a seller's existing mortgage to a buyer. Here's what you should know.

Find out how low your new mortgage loan rate could be here.

Does an assumable mortgage make sense in today's rate environment?

An assumable mortgage may be worth exploring in today's environment, especially if you can secure a lower rate. In fact, the main advantage of considering this type of loan is the potential for securing a lower mortgage rate in a high-rate environment. 

For example, if the seller has a 4% rate on their current mortgage loan, by assuming their mortgage loan, you'd be saving more than 3% on your mortgage rate compared to today's over-7% average mortgage loan rates. In turn, you'd save a lot on interest. 

However, whether an assumable mortgage makes sense for you depends on factors like your financial situation and how much you've saved for a down payment. That's because you typically need to pay the current mortgage holder the difference between the current value of their home and the remaining balance on their mortgage loan to assume the mortgage loan.

An assumable mortgage could be an option worth considering, for example, if you can both secure a lower rate and also afford to pay the difference in the current seller's mortgage balance and the current value of their home, Fate Whiten, a licensed Realtor at Keller Williams, says.

"If you are lucky enough to buy a home with an assumable mortgage, you should run the numbers to see if it makes sense," says Melissa Cohn, Regional Vice President at William Raveis Mortgage. "The key part of the decision is whether you need to borrow additional funds to close."

Although some lenders might provide a home equity line of credit (HELOC) behind an assumable mortgage to bridge the gap between the cash you have on hand and your closing costs, HELOCs are typically more expensive in terms of rates, according to Cohn. 

"If the HELOC amount is greater than the assumable loan, the math may not work," Cohn says.

Some assumable mortgages won't allow a second mortgage, either, according to Cohn.

"If you need to borrow a total of more than 90% then an assumable loan doesn't work, as most HELOC lenders won't finance more than a total CLTV of 90%," says Cohn.

An assumable mortgage also might not be the best solution if you're looking to close quickly. Cohn says the process of assuming a mortgage can take between 60 to 90 days on average.

Compare your top mortgage loan options and start the pre-approval process now.

How to find an assumable mortgage

Finding an assumable can be challenging since only government-backed loans, such as USDA, FHA and VA loans are assumable. Conventional loans generally can't be assumed.

Plus, many current homeowners might not want to sell if they have a low rate. 

"People with very low mortgages, 3% to 5%, who took a loan during the pandemic, are not likely to be putting their home on the market right now," says Dottie Herman, vice chair and former CEO of Douglas Elliman Real Estate.

That said, you might be able to find one by entering "assumable mortgage" when searching a real estate website. 

"They are more common in single-family homes, and many real estate brokers today will add the assumable loan to the listing," says Cohn. 

Other ways to save money on a mortgage loan

If assuming a mortgage isn't an option for you, there may be other ways to secure a lower mortgage rate, even in today's high-rate environment. 

For example, you could buy mortgage points to lower your rate. One mortgage point typically costs 1% of the loan amount and lowers your rate by about 0.25% (though it can depend on the lender). So, if your home loan is $450,000, one point would cost $4,500 and reduce your mortgage rate by one-quarter of a point.

Another potential way to secure a lower rate is to choose a 15-year mortgage loan instead of a 30-year mortgage loan, as these shorter-term mortgage loans typically come with lower rates on average. However, this option only works if you can afford the higher monthly payments that come with a 15-year term.

The bottom line

Assuming a mortgage might make sense in today's rate environment, especially if you can afford the potential higher down payment amount. However, it's important to do the math and weigh all the factors before you go this route to determine whether it makes sense for you. If it doesn't work, consider other ways to secure a lower mortgage rate, like working with a mortgage broker or buying points to reduce your rate.

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