Assumable Mortgages, The Key Ingredients

An FHA and a VA mortgage walk into a bar and are immediately surrounded by aspiring homebuyers Why are they so popular?

Both of these loan types allow buyers to take over the seller’s existing mortgage, including its interest rate, repayment period, and remaining balance. If this interest rate is in the sub 2, 3 or 4% range, this will spell HUGE savings for the lucky buyer who, with lender approval, assumes these loan terms.

If you are actively shopping for a home and want to know how to evaluate an assumable mortgage could work for you, here is a break down of the critical aspects of an assumable mortgage and what you need to consider before making a decision

1. Interest Rate – The Game-Changer
The marquee feature of an assumable mortgage is a low interest rate. The United States had a ten year run between 2012 and 2021 where 30 year fixed mortgage rates were consistently below 4%, with the exception of a few short blips. Low interest rates matter for a number of reason’s-

- A lower interest rate means lower monthly payments.
- Lower payments enable buyers to afford more “home” without increasing their budget.
- Over a long period of time (like a mortgage), the savings enjoyed from a low interest rate could amount to a large amount of wealth accumulation

2. Original Loan Date – How Much Time is Left?
The original loan date tells us how far along the seller is in their loan term. Since the mortgage is being assumed rather than restarted, buyers step into the existing amortization schedule, meaning fewer years remaining on the loan. This feature is a double-edged sword, though.

The nature of mortgage amortization is that each successive payment made in a mortgage applies a higher percentage to principal. This means someone who assumes a mortgage on the 100th payment will pay down their balance faster than someone who assumes a mortgage on the 10th. This is great!

On the flipside, the lower the balance of an assumed mortgage, the higher the down payment. Putting aside the use of a second mortgage, which we discuss below, a purchaser using an assumable mortgage will have to come out of pocket for the delta between their home’s sales price and the mortgage balance.

3. FHA Assumable Mortgages – Will You Have MIP Payments?
If the assumable mortgage is an FHA loan, buyers need to know whether they will be required to continue paying mortgage insurance premiums (MIP). Many FHA loans require MIP for the duration of the loan, even when assumed. There are some exceptions to this rule, but the additional cost of MIP is crucial when calculating whether assuming an FHA mortgage makes sense.

4. Second Trust – Will the Mortgage Servicer Allow It?
As we mentioned above, when assuming a mortgage, the buyer needs to cover the difference between the home’s sale price and the existing mortgage balance. This amount is traditionally paid in cash, but some purchaser’s prefer to use a second loan (second trust) to cover at least a portion of the gap. That said, not all mortgage servicers allow a second trust to be used in an assumption.

Something important to consider here is that the second trust will have a current-market interest rate that will likely be considerably higher. This will cancel out some of the savings compared to using a new mortgage, but in most scenarios, the borrower will still likely save a considerable amount of money.  In weighing the use of a second trust for an assumable mortgage, consider the following-

- If a second trust is not permitted, the buyer must have enough liquid funds to cover the difference.

- If allowed, the buyer will need to qualify separately for the second loan, which may come with a higher interest rate.

Other Important Considerations
There are a number of other components of an assumable mortgage that buyers and sellers need to consider. To ensure our clients have all the information needed to make informed decisions, we have a full team that walks our buyer and sellers clients through every aspect of the assumption. An overview of additional items to consider includes-

- Loan Servicer Policies: Each mortgage servicer has unique requirements and processing times for assumptions.

- Seller’s Liability Release: Sellers should ensure they are fully released from future liability once the loan is assumed.

- Approval Process: Buyers must qualify with the mortgage servicer, just as they would for a new mortgage, including income verification and creditworthiness.

Is this something you should consider?
Assumable mortgages can be a powerful tool for buyers looking to save on interest rates and monthly payments. However, understanding the key parts of the loan—interest rate, original loan date, MIP requirements, and second trust options—is critical to making a well-informed decision.

At Assumable Money, we guide buyers and sellers through every step of the assumable mortgage process. Have questions? Schedule a free 15-minute strategy call with us today!

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