What You Need to Know About Assumable Loans

Buying

More homes are coming into the market with an assumable loan option. With mortgage rates being the highest it’s been since 2000, the appeal of assumable loans has resurfaced. I think it’s a great option but I’d like to explain it more in detail as it’s not an option for everyone.

What is an Assumable Loan?

An assumable loan allows the buyer to take over a seller’s existing mortgage terms, interest rate, and remaining balance, instead of getting a new mortgage.

How this can be beneficial

It’s 2023, and mortgage rates at the time of this writing hover around 7.5%. Contrast this with the rates from 2020, which were as low as 3%. If you’re buying a home with an assumable mortgage that originated in 2020, you could inherit that lower rate, dodging the brunt of today’s higher rates. Pretty awesome, isn’t it?

For example, meet Sarah and John. Sarah is selling her house with an outstanding mortgage that has a 3% interest rate. John is looking to buy and finds Sarah’s home perfect. Instead of taking out a new mortgage at the current rate of 7.5%, John assumes Sarah’s mortgage, instantly saving on interest.

The Pros of Assumable Loans

  • Interest Rate Advantages: Given my example, stepping into a 3% interest rate when the current rates are 7.5% could mean significant savings in interest over the life of the loan.
  • Lower Closing Costs: Typically, assumable loans require lower closing costs than obtaining a new mortgage.
  • Simpler Transaction: With less paperwork than a new mortgage application, assuming a loan could be a less cumbersome process.

The Cons of Assumable Loans

  • Qualification Requirements: Even though you are assuming a loan, buyers must meet the lender’s credit and income requirements.
  • Equity Payment: If the home has increased in value, the buyer must typically pay the seller the difference between the remaining loan balance and the home’s current value. This could mean a substantial amount that you have to bring for a downpayment. But know that there are lenders who offer a second loan at current market rates to help out with this. 
  • Limited Availability: Not all loans are assumable. Common assumable loans include those backed by the FHA or VA, but many conventional loans are not.

Weigh Your Options

When considering an assumable mortgage, it’s important to weigh the upfront costs against long-term savings. If the current interest rates are significantly higher than the rate of the assumable loan, the savings on interest can be considerable. However, if assuming the loan requires a hefty upfront equity payment to the seller, this could offset the benefits.

To Sum it Up

Assumable loans can be a great choice given the right circumstances. This option offers the buyer a chance to lock in a lower interest rate and potentially lower closing costs. For sellers, it can be an attractive selling point, especially in a market where buyers are sensitive to rate hikes.

As with any financial decision in real estate, I always recommend that you speak with a lender to guide you through the intricacies of assumable loans. Everyone’s situation is unique and as your Realtor, I want to ensure that it’s the right move for you.

Hi, there!

I find it truly rewarding when my home buyers find the right home at the right price and when my sellers get to net the highest profits for their home.
Let me know how I can help with any of your real estate needs. 

LET ME KNOW HOW I CAN HELP YOU ACHIEVE YOUR REAL ESTATE GOALS THIS 2024!

720.899.6394

480 S Holly St Denver, CO 80246

iyakohrealtor@gmail.com

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Hi there!

I find it truly rewarding when my home buyers find the right home at the right price and when my sellers get to net the highest profits for their home.

Let me know how I can help you achieve your real estate goals this year!

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BuyING A HOME

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