Assumable Mortgage Case Study: 42.5% Less Down with a 22.5% Lower Monthly Payment!

If you have heard how people are saving $1000’s each month using assumable mortgages, but are having a hard time visualizing how buying a home with a loan assumption works, this blog post is for you! 

To illustrate this, I am going to use this home listed for sale on the MLS for $662,500 in Ashburn, VA. Our software tells us this home has an assumable mortgage with a 2.65% interest rate and balance of $592,062. For this case study, I am going to keep things super vanilla and compare using a mortgage assumption for the purchase of this home with purchasing it with a 20% down payment and a fixed 30-year mortgage rate of 6.5% with zero discount points. 

Let’s take a look at a comparison of how much money would be required for a down payment, what a monthly payment would look like, how much interest would be paid over the life of the loan, and what type of income would be needed for a borrower to qualify. 

Cash To Close: The down payment requirement for assuming a mortgage is calculated by taking the sales price and subtracting the loan amount. In this case, to keep things simple, I will assume the buyer will pay the full asking price of $662,500. 

- Option I: 20% down payment with a new mortgage at a 6.5% interest rate 

- Option II: Assume the current owner's mortgage at a 2.65% interest rate with a downpayment equal to the sales price and the current mortgage balance ($70,437, ~11.5%)

In this instance, thanks to the comparatively high loan balance, the buyer would save $62,063 assuming the current mortgage balance. This won’t be the case in all (most, really) cases where a home has an assumable mortgage, but I chose to use this home as a case study to show that opportunities like this exist. 

- Option I (20% down): $132,500

- Option II (assumed mortgage): $70,437 ($62,063 lower down payment)

Monthly payment: The mortgage payment for an assumed mortgage is based on the owner’s original mortgage amount. In this instance, public records show they purchased the home for $643,590 in September 2021 with a VA mortgage. 

Because of the low interest rate on the assumed mortgage, even with a balance that is $62,063 higher than what the buyer would have on the new mortgage, the Principal & Interest (P+I) payment with the assumed mortgage would be $757 lower. 

- Option I ($535,200, 6.5%): $3,350 Principal & Interest

- Option II ($592,062, 2.65%): $2,593 Principal & Interest (-$757/ month)

It’s important to note the buyer of this property will also be responsible for making the annual tax payments, which are shown as $6,165, along with the HOA and Condo fees of $335, and property insurance, which Zillow estimates as $221/ month in their calculator. 

Interest paid: This brings me to a really cool part of mortgage assumptions. Thanks to the way interest is front-loaded in mortgage amortization, more of the purchaser’s initial payments will go to principal when they buy with a mortgage assumption. 

I have broken all of this down inside this google sheet so you can see how, In this example, $479.13 (14.3%) of the borrower’s first payment would go to principal with the new mortgage (payment #1 of 360) vs. $1283.13 (49.5%) with the initial payment of the assumed mortgage. 

All-in-all, over the remaining 26.7 years of this mortgage, this will equate to a reduction in interest costs of ~$442,016.12. A complete breakdown can be seen in. 

‍Income to qualify: A related advantage of the lower monthly payment is that it’s easier for borrowers to get approved for assumed mortgages when it comes to their debt-to-income ratios. In this example, assuming a mortgage lender had a limit of 36% for the applicant’s debt-to-income ratio, an applicant would need to make approximately $109,109.00 to qualify for the assumed mortgage vs. approximately $134,326.33 to be approved for the new mortgage with the higher interest rate. 

‍Conclusion: Thanks to the comparatively higher mortgage balance that only requires an 11.5% down payment, the advantages of using an assumable mortgage for this property are pretty universal across the board. This won’t be the case for all properties that are available with an assumable mortgage, but a well trained agent (like the ones available through Assumable Money), can walk you through the requirements for all properties. 

‍Variables to consider: 

This feels like a good time to disclaim that I am not a lender, and this information is provided for educational purposes only. All figures quoted below are estimates. Buyers should consult with a representative from the applicable mortgage servicer to verify loan eligibility, rates, and terms before making any financial decisions about buying a home with an assumable mortgage. 

It’s important to remember all of the information about the assumed mortgage will need to be verified with the mortgage servicing company. The software I use to create this case study uses information available in the public records and makes assumptions on what the borrower’s interest rate likely is. As such, the exact numbers should be really close, but could vary. Each mortgage servicing company will have their own process for underwriting mortgage assumptions, so, in theory, the same borrower could be approved to assume a mortgage by one servicing company and declined by another. Our agents help our clients mitigate these differences by using a servicing company that specializes in processing assumable mortgages. 

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Want to learn more? If you would like to learn more about how this process works, book some time on my calendar for a free 15-minute strategy call. 

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