BuyingMortgagesReal Estate TipsSelling April 4, 2024

Smart Agents Will Excel at Assumable Mortgages

If I were asked by a seller what separates me from other agents to get them the best price for their home, I’d answer their question with a question of my own.

What type of mortgage do you have on the house now?

If the answer were an FHA, VA, or USDA mortgage, I’d then ask what rate they are paying.

If their rate were below 6%, for example 4.75% as millions of loans have now, I’d explain how I’d market their home to the buying public as an opportunity to buy a home in 2024 with a mortgage rate of 4.75%.

What sorcery is this? What gimmick? It’s the age old practice of assuming a mortgage.

Right now in the US there are millions of homes with mortgages that are assumable (with bank approval, which is not a significant obstacle for anyone who was buying with a mortgage at the current rates anyway), and a huge number of them have relatively high mortgage balances because those loans didn’t require a large down payment originally. Many buyers are fully prepared to put $100, $200, or $300 thousand down on their next home purchase. And if they have that kind of money down, they can assume an existing home loan with it’s original rate.

Marketing a home in today’s market with the verbiage that “mortgage is assumable at a rate of 4.75%” would attract even higher demand and should command a premium, especially since the fear of under appraisal would be virtually nonexistent. Assuming mortgages is a lost art, and all government insured loans like FHA and VA are assumable with lender approval. And for the average buyer, getting approved at 4.75% for example is far easier than getting approved at 7%.

I’ll draw out a scenario to illustrate the difference.

The home being sold is $700,000.

Right now, if a person were to buy that home with a mortgage of $500,000 at 7%, their principal and interest payment would be $3327. Now let’s suppose they instead found my prospective listing as illustrated above with a mortgage balance of $525,000 and the interest rate is 4.75%. There are 25 years left on the mortgage.

In both scenarios, the buyer puts $200,000 down. If they didn’t assume the mortgage, their principle and interest payments would be $3327. If they assume the existing mortgage, their principle and interest payments are $2608. That’s a $700 difference, which might shrink a bit if you add mortgage insurance required on FHA loans. But it gets even better.

The assumed mortgage only has 25 years left, which means the buyer is saving 72 mortgage payments. 72 x $2608 = $187,776.00. Moreover, they have paid the balance down by $25,000, which will take even more years off the life of the loan. And if they sell in the near future themselves, their buyer may also be able to assume the mortgage!

This is not a new gimmick or something that pushes the envelope of creativity. The HUD Website has an excellent page on the practice. My parents assumed the mortgage of the house I grew up in when they bought it in 1957. I’ve sold assumable transactions many times myself. It’s a forgotten art, mainly because tech has driven the industry away from the basics and into a preoccupation with digital everything.

Obviously, an experienced real estate attorney is crucial to make sure the seller has the release of liability for the original loan, which shouldn’t be hard to do. And of course the buyer should also have their attorney making sure their interests are covered as well.

There are millions of these mortgage out there, so they aren’t unicorns. Smart agents who understand this transaction will have lucky clients if the opportunity arises.