At first glance, Assumable Home Loans seem like a great solution to a problem that homebuyers have been facing lately.
With mortgage rates now approaching 6.5% instead of 3%, housing affordability has suffered significantly. It is now at its worst levels in decades.
Coupled with the continued rise in home prices, many potential buyers have been prevented from entering the housing market.
But with an assumable loan, you can get the seller’s mortgage, which is often very low these days, sometimes less than 3%.
While this all sounds well and good, there’s a very big (literal) problem: the down payment.
Wait, how much is the down payment?
As mentioned earlier, an assumable mortgage allows you to assume the seller’s mortgage. So the mortgage rate, remaining loan balance, and remaining loan term are all yours.
For example, let’s say a home seller received a 30-year fixed rate of 2.75% five years ago when mortgage rates reached record lows. Suppose the loan amount was $500,000.
Today, they are selling the property and the balance owed is approximately $442,000. The remaining loan term is 25 years.
It would be nice to inherit this low-rate mortgage from the seller rather than settling for, say, 6.5%.
Here’s the hard part. The difference between the new selling price and the outstanding loan amount.
Let’s say the seller offers the property for $700,000. Remember, housing prices have risen over the past decade, and even just over the past five years.
In some metros, prices have risen nearly 50% since 2019. So a price of $700,000 wouldn’t be unreasonable, even if the seller originally paid nearly $500,000.
Do you have $250,000 on hand?
Adding these numbers together, a hypothetical home buyer would need more than $250,000 for a down payment.
Most of them don’t even have a 5% down on a home, let alone a 20% down. That’s closer to 36%!
To bridge the gap between the new purchase price and the current loan amount. Using simple math, about $258,000.
While this may sound crazy, just look at the real listings above from Roam, which list properties with an assumed mortgage.
Not only is this a significant amount of money, but it also means that a significant portion of the purchase price will not have the benefit of 2.75% financing.
It will be subject to whatever the rate is on the second mortgage, or it will simply be tied up in the house and illiquid (assuming the buyer can pay it all out of pocket).
Let’s pretend they’re able to get a second mortgage for a chunk of it, maybe $200,000.
If we combine a first mortgage at 2.75% for $442,000 and say a second mortgage at 8% for $200,000, the blended interest rate is about 4.4%.
Yes, it’s less than 6.5%, but not much less. And many mortgage rate forecasts put the 30-year fixed rate in the 5s by next year.
If you’re paying points at closing at the refinance rate, you might be able to get a rate as low as 5%, or maybe even something in the top 4, assuming the outlook holds up.
It then becomes much less urgent to try to afford the mortgage.
Are you choosing a home mortgage?
The other problem here is that you may start looking at homes that have cheap, assumable mortgages.
Instead of thinking about properties you might prefer. At this point, you could end up choosing to home due to the mortgage.
This just becomes a slippery slope of losing sight of why you bought a home to begin with.
If you’re shopping for a home and find out that the loan is assumable, that could be a great thing.
But if you’re only shopping for homes that feature assumed mortgages, this probably isn’t the best move.
Also note that the process of obtaining a loan can be stressful and the seller may list higher knowing they are offering an “original.”
So in the end, once you take into consideration the mixed price and the higher selling price, and the possibility that the property isn’t ideal for your situation, you may wonder if it’s actually a bargain.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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