'The mortgage cheat code': If you want lower interest rates, there's a little-known way to get them

Homeowners with certain loans can sell their low-interest-rate mortgages to qualified buyers.The transaction is called an assumable mortgage, which has grown in popularity as rates have risen.Assumable mortgages are hard to find, take long to process, and are only good for certain buyers.

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Earlier this year, Felix Claudio struggled to buy a home in Atlanta for his family.

Mortgage interest rates reached almost 8% in October — the highest in over 20 years — leaving homebuyers like Claudio, a 55-year-old senior logistics manager for a transportation company, worried about affording monthly payments.

Then Claudio discovered assumable mortgages: A relatively little-known housing-finance option that allows qualified buyers to assume, or take over, the home sellers’ existing mortgage. After assuming an existing mortgage, buyers acquire the interest rate, current principal balance, and other conditions of a seller’s existing loan. Through Roam, a startup that connects homebuyers with sellers willing to sell their mortgages, Claudio purchased a 2,400-square-foot, $400,000 home with a 3.5% interest rate in October.

“I just couldn’t believe it,” Claudio, who pays $2,100 a month, told Business Insider. “I’m literally saving $700 to $800 a month on my mortgage payment. It’s a win-win situation, no matter which way you look at it.”

Mortgage interest rates, which have been increasing since November 2021, have pushed some buyers to postpone home purchases until rates go down, while others have been priced out of homebuying altogether. The stressful environment has led to a resurgence of interest in assumable mortgages.

The vast majority of properties in the US — 92% — have loans with interest rates below 6.71% as of June 2023, according to Redfin, which means buyers who assume mortgages will likely get a significantly lower rate than they would if they took out a new loan. Sellers, for their part, may want to use assumable mortgages to attract buyers who are willing and able to pay a higher price thanks to lower rates.

Assumable mortgages might sound too good to be true, but they come with challenges. First, they’re only available to certain buyers who qualify based on income, past military service, or residence in a rural area. They’re also rare: From September 2022 to September 2023, there have been only 3,810 cases of loan assumptions, according to data shared with BI from the US Department of Housing and Urban Development. But their popularity is rising, with this year’s assumptions marking a 67% increase from the previous year’s rate of 2,279 and a 106% increase from 1,841 the year before.

“For a lot of struggling families that want homeownership but can’t afford high interest rates, this is a great solution,” Rachel Roberts, a cofounder of the assumable-mortgage-processing company UMe, told BI.

The ‘mortgage cheat code’ everyone should know about

Assumable mortgages have existed since the 1980s, when rates reached an all-time high of 18.6%. Their resurgence has only come about since rates started rising from historic lows in late 2021, according to Mike Roberts, the other cofounder of UMe, Rachel Roberts’ husband, and a mortgage lender with 23 years of experience.

“Mortgage rates have been going down for 40 years,” Mike Roberts said. “You would never assume a higher interest rate than what you’d be able to get in the market, but rates have shot up and that’s a monster reason why they’re becoming popular.”

Terry Day, a real-estate agent from the Phoenix area, used an assumable mortgage to purchase a home this year.

In October, he and his wife bought a 2,232-square-foot home in Goodyear, Arizona, for $385,000 with a 2.375% interest rate. Their mortgage payment amounts to $1,962 a month.

“We’re saving about $1,000 a month on our payments,” Day told BI. “It was just a really easy transaction to make.”

Day first learned about assumable mortgages last year while researching affordable home-financing options for a client looking to buy. He decided that a loan assumption could help his client make a competitive offer on a home.

“This way, my client could get a payment he was comfortable with and the seller could get a higher price for their home,” he said.

Now Day tells every buyer he meets about assumable mortgages.

“I educate them on the possibility of saving a tremendous amount of money on a monthly basis with an assumable purchase,” he said. “I call it the ‘mortgage cheat code.'”

Assumable mortgages are hard to find and take a long time to process

Assumable mortgages come with some downsides.

First, few buyers qualify: Those who do tend to qualify for loans from the Federal Housing Authority, the Veterans Benefits Administration, and the US Department of Agriculture.

There also aren’t many sellers willing to transfer their mortgages. Day said it’s difficult to find properties for sale with assumable mortgages on listing sites such as Zillow or Redfin.

“Almost all automated searches rely on data inputs on listings from Realtors and many do not understand assumable mortgages,” he said. “If they do not mark that a home has an assumable mortgage then it will not show up in an easy search.”

It can take lenders longer to process these loans, in part because mortgage brokers tend to make more money originating new loans than facilitating transfers, according to American Banker.

Rachel Roberts said that not all lenders have employees who can process assumable mortgages.

“One of the biggest issues that I’m seeing is that assumable mortgages are a lot more difficult than they should be,” she said. “Servicers have no incentive to really participate in the assumption. They’re going to have to build departments that they haven’t had in 40 years, which is going to cost money and time.”

Because of that, she said assumable mortgages can take months to process, which may end up costing homebuyers and sellers money.

“When a seller calls, I tell them it’s going to take four to six months for an assumption to go through,” she said. “You’d have to make four to six more mortgage payments before we do our part.”

Buyers may need to make up the difference between the amount left on the loan they assume and the house’s purchase price. That might mean having a stash of cash in savings or taking out a second loan at the higher going rates.

Still, Claudio, who had to wait about four months before his home deal closed, said the downsides were worth it.

“You have to think about the long term, this is an investment,” he said, adding that assumable mortgages are the “loan of the future” because they help people buy homes “at good rate and with affordable mortgage payments.”

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