Assumable loans are beginning to gain steam in the world of 7% mortgage rates according to a Wall Street journal article published September 13, 2023.
The essence of the article is that new home buyers are becoming aware of assumable loans and beginning to assume loans from seller’s as a financing strategy to save money on their mortgage payments. The concept of saving money with an assumable loan is that a buyer can takeover a seller’s loan balance at their lower rate. According to the article there are currently millions of outstanding loans with 3% interest rates.
The caveat with an assumable loan is that you can only assume a balance on a loan. A buyer would need to originate a new loan for the balance of the purchase. For example, a home buyer is purchasing a home for $500,000 and the seller has a loan balance of $200,000. The home buyer would need to come with the balance of $300,000 with cash or by originating a new loan at current rates after assuming the seller’s loan.
Another caveat, not all loans are assumable. According to Black Knight, a mortgage data and tech company, about 22% of outstanding government loans have the assumable loan feature. VA loans are one type of loan that is assumable. In San Diego, CA the VA loan is widely used due to the military presence throughout the county. Could this be a tool for VA buyer’s and others to save money on their new home purchase?
While I believe that this knowledge could ultimately be helpful for astute homebuyer’s with knowledge and understanding of this loan feature, I don’t think that many buyers will be banking on this tactic to make their home purchase possible. But maybe.
The problem with banking on this strategy is not only being aware enough to ask about whether a home loan is assumable or not or even the availability of assumable loan types in the market with balances significant enough to move the needle on affordability. According to the article, lenders may stand in the way of making assumable loans a priority since the fees collected are so low and holding a lower rate loan for longer not as profitable than issuing new debt. In real estate, time if of the essence and if processing assumable loans is not a profitable venture for lenders, they may not be so keen on making it priority the article argues. Apparently there is a startup that is hoping to make this process easier, for a fee of course.
Nevertheless, having knowledge of this strategy might have more Buyer’s asking, “What if I assume the loan?”
