When a lender mentions you have an assumable loan, what do you think? Who is going to assume my loan? Why would someone assume my loan? What exactly does that mean?
For many years rates have been very great. Lately, they’ve been so great, some say we may not see rates like this ever again. Well, assumable loans don’t really mean much until mortgage rates go up or until you have someone looking to assume yours. And not only do they need to go up, but they need to rise enough to make the rate on the assumable loan attractive. For the last 10 years, there really hasn’t been enough rise in interest rates to cause assumable loans to be desireable. Well, with every expert in the business expecting rates to rise significantly in the upcoming 12-18 months, this is about to change.
Today the current rate for a typical FHA mortgage is hovering right around 4.25%–an absolutely incredible rate. Now imagine if the experts are correct, and rates rise to anywhere around 6-8% which is exactly where they have been in recent years. That’s a 2-4% difference in the rate that the assumable loan was locked in at in 2010, and the rate at which a new borrower would receive if they bought in 2-4 years from now. Now imagine you’re the buyer looking for a home in 3 years (2013). You have Seller A with a great home at $300k with a typical conventional non-assumable loan. In this case you would need to get a mortgage to purchase this home like most buyers. Let’s now assume the rate in 2013 for the same FHA mortgage is around 7%, which as most predict, is not unrealistic. Next, you come across Seller B that has the exact same comparable home, but he’s marketing his home as having an assumable FHA mortgage option (Of course, you have to qualify for this loan just like a new loan). Seller B’s home was purchased in 2010 at the 4.25% rate. Now Seller B has a 2.75% interest rate advantage over most other sellers in the market. That’s approximately a $500 difference in the payment. That’s a huge advantage for those buyers who are buying today, at unbelieveable rates, taking advantage of low downpayment options like an FHA loan (that are ASSUMABLE) then decide to sell in upcoming years when rates are expected to be much higher. That would almost definitely help Seller B make THOUSANDS higher in their sales price, vs Seller A.
Just another incredible advantage to buying in this great “buyer’s market”! Especially with an assumable loan. ^ Andy