Scoring a low mortgage interest rate has become a greater challenge in a high-inflation and high-interest-rate environment. Many homebuyers have been chasing an almost mythical 3% rate ever since interest rates hit historic pandemic-era lows in 2021 of around 2.91% (for an average 30-year fixed rate loan).
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While buyers are unlikely to see rates anywhere near that again, there is one possible mortgage hack that could get you to a 3% rate. This hack is known as an assumable mortgage, and it’s gaining renewed attention at a time when homes may feel harder than ever to buy.
Here’s how it works, and a few caveats.
Understanding Assumable Mortgages
An assumable mortgage is when a homebuyer assumes (takes over) the seller’s existing mortgage under the original terms — including its interest rate, repayment period and remaining balance. This allows the buyer to take advantage of a lower interest rate secured by the seller.
Not all loans may be assumable, however. Good loan types to look for include government-backed loans, such as those from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA).
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Benefits for Buyers
The most obvious reason to assume a mortgage is that you can get an interest rate that isn’t available through other financing, such as a 3% interest rate that a seller locked in earlier, versus a 6.5% going rate. This can significantly lower your monthly mortgage rate and interest paid over time on the principal.
Another benefit is that with an assumable mortgage you may have lower closing costs if it doesn’t require a new appraisal or loan origination fees.
Advantages for Sellers
There are also advantages for sellers. Homes with assumable mortgages can attract more buyers in a sluggish housing market. The added value of a low-interest mortgage may also justify a higher asking price.
You Still Need To Qualify
While this sounds like a fabulous deal, remember that it’s not a magic solution. You still have to meet qualifying criteria for a home loan, such as having good credit, sufficient income and a solid debt-to-income ratio. The process itself could also be just as rigorous as applying for a new loan.
Upfront Cash or Second Loan
The biggest caveat is that the buyer has to cover the difference between the seller’s mortgage balance and the home’s current sale price. So, say a house is selling for $500,000 and the seller only owes $400,000, the buyer must bring $100,000 in cash — or take out a second mortgage, often at today’s higher rates. This can sometimes negate some or all the savings from the low-rate assumed mortgage.
A Potentially Longer Process
Not all mortgage servicers are equipped to handle assumptions, so the processing time can stretch well beyond the typical 30- to 45-day closing window. This might also make some lenders reluctant or slow to act since they make more money originating brand new loans.
Hidden Costs
Though your closing costs could be lower, there can still be fees for processing the assumption, legal paperwork and new title insurance. Some servicers may charge up to $1,800 in assumption fees, and some buyers may still want inspections and their own appraisals.
Finding Assumable Mortgages
If the idea still appeals, you can start looking for assumable mortgages through platforms like Roam, which specialize in listing homes with them. These services can also assist in navigating the assumption process.
Assumable mortgages offer a unique path to homeownership with potential financial benefits in a high-interest-rate market. However, be sure to consult with a mortgage professional before jumping on one.
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This article originally appeared on GOBankingRates.com: This Mortgage Hack Could Score You a 3% Rate — But Is It a Good Idea?
