Assumable Loans Are Back

Just last month, I was able to refinance my home to an even lower rate than what I had in 2008. I am just amazed that I have a mortgage with less of an interest rate than what my parents paid for our home in 1968. What really blew me away was when my lender told me that my loan was assumable. I thought assumable loans were a thing of the past, but FHA loans are assumable, and now some conventional loans are as well.

The assumable loan was almost a must for homebuyers in the late 70’s and early 80’s when interest rates climbed to 16% and higher. When a seller had an assumable loan, they definitely had an advantage over someone that did not. For those of you who are not in the real estate market, here is how an assumable loan works.

Let’s say an individual selling their home had an assumable loan and is asking $390,000. The buyer interested in that home may agree on the purchase price and assume the seller’s loan. The seller’s balance on the loan is $300,000 so the buyer assumes the balance at the seller’s rate (say 3.5%) and then brings the $90,000 cash to closing to make up the difference. Back in the 80’s, some of these assumable loans did not even require the buyer to qualify. Some also had a provision that they could raise the interest rate. They are not that way now, so be sure to check with your lender on the terms. Most of the assumable loans will also require the buyer to pay a transfer fee (perhaps $350 or more).

If you are purchasing a home or refinancing your home, I think every homeowner should look up the option of getting an assumable loan. Let’s face it: interest rates have nowhere to go but up. God forbid the interest rates get to 8, 9 or 10% but if they do, a homeowner selling their home with a low assumable interest rate is in the driver’s seat. It’s safe to say that a buyer would pay a premium for a home with a low and assumable interest rate. This could easily add thousands of dollars in value to someone selling their home.