Posted November 28, 2022 in Real Estate Trends
Now interest rates have gone back up. Home prices are slowly adjusting. However, now we have something else that people haven’t heard of in almost two decades… Assumable Loans. So, what is an Assumable Loan? Let’s start with an example…
Let’s say I have a client who is selling their home for $500,000. They have a current loan with an interest rate of 2.99%. Their loan balance is $375,000 and their current payment is $2,300 a month. They have owned their current home for 5 years, and have 25 years left on their loan.
For the right buyer, this is a deal of a lifetime! The buyer can ‘assume’ the sellers current loan of $375,000 owed, 2.99% interest rate, $2,300 a month payment, and only 25 years left on the loan. So what is the catch, right? Well, the home is being sold for $500,000, so the remaining amount of $500,000 minus $375,000 ($125,000 for those of you without a calculator handy) would need to be made up with either cash at closing, or with a 2nd loan. The buyer isn’t just buying the home for the current mortgage owed on the assumable loan. When you assume the loan, you assume all terms of the current loan. You can assume the current loan with the current terms, but if you want to change the loan type/terms that would be refnancing and you would lose the 2.99% interest rate.
If you are interested in a home with an assumable loan, there are questions your Realtor needs to ask.
1 – What type of loan is it currently?
2 – How many years are left on the loan?
3 – What is the current amount owed on the loan?
4 – What is the current interest rate?
5 – What is the current payment?
6 – Does that payment include mortgage insurance? Taxes? Homeowners Insurance?
You have to go through the pre-approval process just like any pre-approval process when buying a home. If you do not have the cash to bring to closing to cover the difference between the assumable loan and the purchase amount, the other option is to get a 2nd loan to cover the difference.
The assumable loan is a great option for a lot of people but it will not work for everyone. If you are thinking about selling, ask your lender/loan servicer if you have an assumable loan. If you are buying a home, have your Realtor ask the sellers if they have an assumable loan. Maybe the difference won’t be so great, but the rewards could defnitely be worth it!