Assumptions Make Sense Again

By
Real Estate Broker/Owner with Morningside Homes, LLC 720-231-5200 DRE# ER300941

 

Existing FHA and VA mortgages are assumable at the note rate to owner-occupied buyers who qualify.  This can be an alternative to paying higher, current rates and benefit buyers with lower closing costs while saving money on the payment.

For the last 20 years, rates have been steadily coming down and there was no reason to qualify for the assumption when a new loan had a lower interest rate.

Assuming an FHA or VA loan with a lower interest rate will obviously mean lower payments but it will also build equity faster because the amortization schedule is advanced from a new 30-year mortgage.  Another benefit is that the acquisition costs on an assumption are much lower than starting a new loan.

In the example in Table One, a couple bought a home two years ago for $400,000 with a 3% FHA mortgage that has principal and interest payments of $1,656.  It is now worth $435,000.

Let's look at a hypothetical situation involving the sale of this home after two years.  The savvy listing agent explains that the home may have additional marketability due to the assumability of the FHA mortgage in place.

In scenario #1, the buyer purchases it for $435,000 with 10% down payment at the then, current rate of 5% for 30 years.  The principal and interest payment is $2,102.  If the home appreciates at 4% annually the equity will be $230,989 in seven years.

In scenario #2, the buyer purchases it at the same price with the same down payment but assumes the 3% mortgage with 28 years remaining.  Since he doesn't have enough cash to buy the equity, he gets a second mortgage for the balance at 5%.  The combination of the payments on the first and second are $1,739 or $363 less than the payments in scenario #1.

In seven years, the $363 savings accumulated to $30,492.  The future equity is $21,457 larger on the assumption because the first mortgage is at a lower rate and the loan is amortizing faster.  In this example, the buyer is much better off assuming the FHA mortgage.

There will be a challenge in identifying which homes for sale have assumable FHA or VA mortgages because for decades it didn't make much difference to list it in the description.  Many MLS's are not even including fields for existing mortgages.

Finding the "Right" home for a buyer is important but equally important is finding the "Right" financing.  Not all agents have the training or the tools to identify the possible opportunities for buyers but the ones who do are invaluable.

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Posted by

Buy or Sell with Patty Clark              Denver/Aurora Co. and surrounding areas 

Chris and Patty

    Helping Families Move with Care

  If you would like to be sent properties on a daily or weekly  basis just call or email me and let me know your wants and needs. A match will be made with a home you love and with monthly payments you can afford. I specialize in first time home buyers and sellers who are

          ready to downsize or move to a larger home as the family grows

     

                                                     Morningside Homes, LLC

patty@morningsidehomes.com

www.morningsidehomes.com
Cell: 720-231-5200                       CRS,GRI,WCR,SFR,CNE, MRE

 

Comments (2)

June Piper-Brandon
Coldwell Banker Residential Brokerage - Ellicott City, MD
Piecing Dreams One Home at a Time

I remember back in the '80s and 90's when interest rates had gone up to 18% and people were assuming mortgages with rates of 8-10%, I bought my house in 1992 and my rate was 12.5%, I thought I was doing good refinancing to 10%.

Feb 28, 2022 08:16 PM
Richard Weeks
Dallas, TX
REALTOR®, Broker

Great information, thanks for sharing.  I hope you have a great day.

Mar 03, 2022 03:09 AM