Are you interested in upsizing or downsizing but are disheartened by the current interest rates? There’s a trick that could save you many hundreds of dollars per month – assuming a loan. Many homebuyers and even a lot of Realtors are unaware of this advantageous option, but it could be your ticket to financial ease and homeownership success.
Loan assumption is the process where a homebuyer takes over the seller’s existing mortgage, including its terms and interest rate. This option is available for FHA (Federal Housing Administration) and VA (Veterans Affairs) loans, making it a potential game-changer for many buyers.
FHA Loans: All FHA loans are assumable. This means that if you qualify, you can take over the seller’s existing FHA loan, keeping the same interest rate and loan terms.
VA Loans: VA loans are also all assumable, but they’re not all offered to everyone. If a veteran assumes a VA loan, the original borrower is free to use their VA loan benefit again. However, if a non-veteran assumes the loan, the original borrower must wait until the new borrower pays off the loan before they can use their benefit on another property. Often, veterans only offer their assumable loans to other vets, but there are many exceptions where the veteran does offer it.
To assume a loan, the new borrower must qualify with the existing lender. This involves meeting credit and income requirements similar to those for a new mortgage. Once qualified, the assuming borrower gets the loan transferred to their name completely, maintaining the remaining term and existing interest rate of the original loan.
One crucial aspect to keep in mind is the down payment. When assuming a loan, you generally need a substantial down payment. This is because the seller’s house has likely appreciated significantly since they took out their loan, and they have been paying off the principal over time. As a result, the difference between the loan balance and the current market value of the home can be considerable, often requiring a larger upfront payment. The down payment is usually in the hundreds of thousands of dollars in our area.
It’s also essential to note that both FHA and VA loans assumed by a new borrower must be owner-occupied. This means the person assuming the loan must live in the property as their primary residence.
For homeowners looking to sell, advertising an assumable loan can be a powerful selling point. In this market with rising interest rates, a home with an assumable loan becomes significantly more attractive, potentially increasing the property’s value and desirability.
Here are two examples of homes currently on the market with assumable loans. They may be sold by now, but they illustrate what’s possible in this market:
5113 N Ravine Lane in Fair Oaks is asking $999,999 with an assumable FHA loan at 2.25% on $445,000. You’d need a down payment of $554,999. At 2.25%, your monthly payment on $445,000 would be around $1,700 (P&I only). At 7%, it would be about $2,960 (P&I only). This means a monthly saving of about $1,260 and an annual saving of $15,100.
8173 Sunset Ave in Fair Oaks has an asking price of $825,000. Assuming the VA loan of $495,000 at 3.875% and a down payment of $330,000. Your monthly payment would be about $2,330 (P&I only). At 7%, it would be $3,290, saving $960 per month or $11,532 annually.
It’s interesting to note that, at the time of this writing, neither of these homes mention in their ads the tremendous value of the assumable mortgages. ** These are not my clients. I cannot comment on their strategies.
Are you considering moving but don’t want to lose your great rate? Here’s a potential strategy to implement or at least discuss with your financial advisor. What if you asked me to find you a new home with an assumable rate? Maybe the home has a pool, a bigger yard, or you want to downsize or live on a golf course. I might be able to find you the perfect home with an assumable loan, allowing you to rent out your current home and keep your excellent rate. Now, you could have two homes, both at great rates.
Assumable loans can offer significant financial advantages. By moving into a new home with an assumable loan at a low rate, you can enjoy much lower monthly payments. Renting out your current home at a higher market rent can generate additional income. This strategy secures you a new home with favorable terms and turns your current home into a lucrative investment property.
Imagine living in your dream home while maintaining an excellent rate on both properties. Does this strategy align with your long-term financial goals? This could be your ticket to smart investment and improved lifestyle without sacrificing your advantageous mortgage rate.
