2.5% Interest Rates in 2024? Let’s Talk Assumable Mortgages

GeneralBuyers

Jan 18

The average mortgage interest rate right now (as of January 3rd, 2024) is a steep 6.99%. But what if you could snag a 2.5% interest rate like the good old days of 2021?

Enter: assumable mortgages.

An assumable mortgage is basically exactly what it sounds like: taking over someone’s existing mortgage. Sounds great, right? Well, there’s a catch.

Are you wondering if an assumable mortgage is the right option for you? In this blog, we’ll explore the pros and cons of this type of loan to help you make an informed decision.

What They Are and How They Work

An assumable mortgage is a type of loan that allows a buyer to take over the existing mortgage of the seller. This means that the buyer essentially steps into the seller's shoes and continues making the same mortgage payments.

Assumable mortgages were popular in the 1980s when interest rates were high, and the steep rates of today’s market have got people talking about them again.

So, what do buyers need to know about these types of mortgages…and what’s the catch?

The process and implications of assumable mortgages are not as straightforward as they might seem at first glance.

Yes, it is technically possible to assume someone else’s mortgage loan. Let’s consider a practical scenario to understand the complexities involved.

Imagine a house purchased five years ago for $600,000 with a $60,000 down payment, resulting in a loan amount of $540,000. Fast forward to today, the mortgage balance has been reduced to $500,000, but the property's market value has soared to $1 million.

Sounds like a great opportunity to assume the existing loan at a potentially lower interest rate, right?

Not so fast.

The Drawbacks of Assumable Mortgages

Gaps in Financing

Assuming the $500,000 loan leaves a gap in financing. If you’re putting $100,000 down, you'll need an additional $400,000. Securing a second mortgage for this amount, especially at a reasonable interest rate, is challenging and often impractical.

Seller Participation and Timeframe Issues

The seller must engage in the loan assumption process, which can be cumbersome and time-consuming – often taking 45-90 days. If the seller can find a buyer willing to purchase at market value through traditional means, they’re likely to bypass the assumption process altogether.

Potential Overpayment for Buyers

To make the deal attractive for the seller, you might have to offer more than the market value. This premium can negate the benefits of assuming a lower-interest mortgage.

Specific Considerations for VA Loans

If the existing loan is a VA loan, the seller’s ability to use their VA entitlement for future purchases is restricted until the assumed loan is paid off or refinanced.

The Real Picture of Assumable Mortgages

In summary, while mortgage loan assumptions are theoretically possible, they are complex and often unfeasible.

They require significant cash upfront, may involve overpaying for the property, and entail a lengthy, complicated process that provides little benefit to the seller and questionable value to the buyer.

In reality, these transactions are rare and generally only viable in very specific scenarios, like purchasing a property from a close family member or friend willing to offer substantial concessions.

An assumable mortgage is not a straightforward path to homeownership. These mortgages involve numerous challenges and complexities that often make them undesirable compared to traditional real estate transactions.

That’s it for me today, friends – see ya next week!

P.S. For more on mortgage interest rates, check out these other posts:

What’s Going On With Mortgage Interest Rates?
How to Find a Good Deal on a House
What is a 3-2-1 Buydown Mortgage? (good for buyers in a high-interest rate market!)
Is Now a Good Time to Buy a House?

Brent Edwards (aka Brent the Broker) is a residential real estate agent and Realtor in San Diego, CA who helps clients buy and sell homes in San Diego, California and all surrounding areas. Brent is a highly-recommended Realtor in San Diego by family, friends and past clients. Call Brent today at 619-550-8070 if you have any questions about real estate in San Diego or you'd like to buy or sell a home.