With interest rates on the rise, you might be hearing more about assumable mortgages. To be honest, I didn’t understand how these worked until just the week. There are still some elements of the loan that I don’t understand– which I will get into. But I thought it might be valuable to share what I have learned thus far.
The truth is assumable mortgages aren’t as great as I thought they were. If you haven’t heard of an assumable mortgage, let me give you the basics. Some types of mortgages are assumable (a VA loan for example) meaning that a buyer can assume the seller’s mortgage and their interest rate. This is particularly desirable if the seller locked in a below market interest rates. For example, if the seller bought or refinanced during the last two years, there is a good chance their interest rate is at or below 3%. With rates currently hovering close to 7%, assuming a mortgage at 3% is a huge cost saver. Sounds pretty good right? Well, here is the catch.
If you as a buyer qualify to assume the sellers mortgage (which is whole different topic) you might be on the hook for more of an expensive than you think. Let’s say the seller bought their house for $1,000,000 and put 20% down. That means they took out an $800,000 loan at 3%. By the time they go to sell, let’s say they have paid off $100,000 of that loan and now owe $700,000. As a buyer, you can assume that $700,000 loan at 3% but more than likely, you are going to need to get a loan for more than $700,000.
Let’s say the seller puts their house on the market for $1,200,000 and you are (somehow) able to put down 20% or $240,000. That means you will need a loan for the remaining amount of $960,000. If you assume the seller’s mortgage of $700,000 at 3%, you are still on the hook for the delta of $260,000. Unless you can find some way to creatively finance the additional $260,000, you are on the hook for paying that in cash. So essentially, to assume the seller’s mortgage at 3% interest you are going to have to come up with $500,000 cash in this scenario.
Bottom line is that assumable mortgages sound great but be prepared to front a lot of cash to make it work. I spoke with two different DC real estate agents who have been in the business for almost 20 years. Both of them said they have never gotten an assumable mortgage transaction over the finish line.
Pictured is a three bedroom house in Michigan Park listed for $750,000. For listing details, click here.
