BY ANNA & MICHELLE
As the expression goes, “If I could turn back time,” maybe you would do some things differently. If you are wanting to buy a home, the regret may come from not getting a mortgage when rates were half of what they are today. There may not be a way to literally “turn back time” but you may still be able to get a mortgage with last year’s rates.
Let’s say a home was sold in the fall of 2021 for $350,000 with a 3% FHA loan. Today, winter of 2023, the home is on the market for sale at $400,000. There are buyers who have $40,000 for a down payment, who like the home and want to purchase it.
At today’s mortgage rate of 6.42%, the $360,000, 30-year mortgage payment would be $2,256.54 for the principal and interest. They have been looking for a year and in the past 12 months the mortgage rates have doubled, which will stretch their finances along with all the other inflationary pressures.
Their incredibly savvy agent has learned that the underlying mortgage is an FHA mortgage at 3.00% with a little less than 29 years remaining. This loan could be assumed by an owner-occupant at the current rate, which would save the buyer a considerable amount of interest.
The problem is that the buyers do not have enough cash to buy the equity. The unpaid balance is $328,902, which makes the equity about $71,000, which is more than the $40,000 they have available.
The agent believes that with the buyer using the $40,000, they should be able to get a second mortgage for the difference of $31,000. While it may not be possible to get a 30-year term on the second, it may be possible to get a 30-year amortization on the payment and have the second loan due in 10 years.
Sources for the second loan could be the borrower’s local bank, a credit union, a relative or other investor not happy with what they’re earning on cash in the current market.
This could save the buyer over $600 a month. In addition to a lower payment, assumptions on FHA loans have lower closing costs, they’re easier to qualify for, and the lower mortgage rates allow them to amortize faster than a higher rate mortgage.
Buyer Scenario #1 … New Mortgage
- Purchase Price $400,000
- 10% Down Payment $40,000
- Mortgage at 6.42% for 30 years $360,000
- Principal & Interest Payment $2,256.54
- Future Value at 3% Appreciation in 7 years $493,342
- Future Unpaid Balance $325,062
- Future Equity $168,280
Buyer Scenario #2 … Assumption
- Purchase Price $400,000
- 10% Down Payment $40,000
- Assume Existing Mortgage at 3% for 28.8 Remaining Years $328,871
- Assume Principal & Interest Payment $1,386.66
- New Second Mortgage at 6.5% for 30 years $31,098
- Payment on Second Mortgage $247.32
- Total Monthly Payments $1,633.94
- Monthly Savings $622.55
- Future Value at 3% Appreciation in 7 years $493,342
- Unpaid Balance on 1st Mortgage in 7 years $266,313
- Unpaid Balance on 2nd Mortgage in 7 years $35,379
- Future Equity in 7 years $191,649
- Increased Equity Over New Mortgage $23,369
In the early 1980s, both Fannie Mae and Freddie Mac added “due on sale” and escalation of interest rate clauses to the standard verbiage on notes and mortgages. From a practical standpoint, this ended assumptions of most conventional mortgages.
FHA and VA continued to be assumable by anyone, regardless of credit, until 12/1/86 and 3/1/88, respectively. At that time, an owner-occupant could assume the existing interest rate but had to qualify to do so. Mortgage rates went down over the next three decades with only some temporary increases until January 2022 when they began to increase dramatically.
If a buyer had to qualify to assume a mortgage, especially if it was higher than the current rates, there was no compelling reason to put more money down for an existing mortgage. Now, in 2023, this environment has changed.
Many buyers who purchased using an FHA or VA mortgage in the past two to three years benefitted from some of the lowest rates in over 50 years. The equities in these properties are still within reason to either assume cash to equity or consider a second mortgage for part of the equity.
If you’d like to learn more about how to assume FHA, VA or USDA mortgages at lower rates than currently available on new mortgages, contact your real estate professional. Unfortunately, some agents are not aware of how assumptions work. Give us a call and we can walk you through the process and even have a spreadsheet that will analyze the comparison for you.
