By Beth Benner, July 23, 2024
If you’ve been paying any attention to interest rate trends recently, the idea of a mortgage rate around 3% probably sounds like a fairytale. And you may be wondering if an assumable loan is the best way to make that fairytale come to life. The answer is a little complicated.
What is an assumable loan?
“Assumable” refers to one party taking over the obligation of another. In terms of an assumable mortgage, the buyer assumes the existing mortgage of the seller, including the current interest rate on the loan. This means that when the mortgage is assumed, the seller is often no longer responsible for their original debt. The original loan must be an FHA or VA loan in order to be assumable but the good news is that a buyer does not need to be a veteran themselves in order to assume a VA loan.
What are the pros and cons of this type of loan?
A mortgage assumption can be beneficial in certain situations, such as when the seller’s original mortgage has a lower interest rate than what is currently available on the market. Sound familiar? Right now, nearly 80% of homeowners have an interest rate that is less than 5%, while rates in July 2024 are closer to 7%. That’s a huge difference!
You’re also unlikely to need a new appraisal with this type of loan which may or may not end up working out in your favor. And you will have to pay closing costs on a loan assumption, which are typically 2-5% of the loan amount but some of those costs may be capped.
The major downsides of this type of loan are that you as the buyer will need to both qualify for the amount of the seller’s existing debt AND bring in the balance of the purchase price, either in cash or by obtaining a second mortgage loan at the current market rate. That can be a lot of financial burden to take on. Plus, it may mean that you’re still financing a portion of the home at the higher rate you were trying to avoid in the first place.
Also, the combination of limited financial incentive and understaffing has resulted in extended processing times for these loans, which can often reach 90-120 days on average. This is certainly not an ideal timeframe if you’re looking to move quickly — and you’ll need to have a patient seller on the other side!
So, should you try to find an assumable loan to snag a lower interest rate?
In the Portland area and in my own experience, we are not commonly seeing assumed mortgages in real estate transactions. It may sound like a great solution to a challenging market, but the downsides nearly always outweigh the benefits depending on the buyer’s (and seller’s) situation.
An assumable loan isn’t the only option so don’t worry if it’s not right for you. Remember, you can always refinance your loan when/if rates drop to a more desirable range in the future! I am happy to connect you with a fantastic mortgage partner who can guide you through this exciting and intricate process! Reach out to me anytime!
Beth Benner
Broker | OR & WA
She/Her
Beth has collaborated on over 500 transactions in her career as a Licensed Broker in Oregon and Washington. In 2023, she earned a spot among the REAL Producers Top 100 producing agents in Portland out of more than 8,000 licensed brokers and she has also maintained her status in the top 5% of all Oregon brokers for eight consecutive years...
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- T: 503-819-2885
- bethbenner@livingroomre.com
