Assumable mortgages: Low rates, but it’s complicated 

Agents know all too well how elevated mortgage rates have eaten into consumers' buying power, reducing the amount of home that buyers can afford and making an inventory-challenged market even tougher to navigate.

This is where assumable mortgages come into play. 

An assumable mortgage is when a homebuyer takes over the existing loan on a property from the seller when they purchase the house — the remaining balance, mortgage rate and all. The idea is fairly simple in concept, but much more complex in practice. For instance, not all 30-year mortgages can be assumed. Only certain loans, such as a FHA loan or VA loan, qualify.

However, the prospect of taking over a sub-3% mortgage rate versus being locked into a 6-7% rate represents real value to both sellers and buyers. 

A recent New York Times trend piece aptly described the assumable loan in its headline as "the hottest thing in real estate is a loan from two years ago." And it's certainly not a stretch to say, at least according to North Carolina-based real estate agent Marshall Pickett, especially if the economy weakens later this year as some economists and experts have predicted.

"If we start to see the economy enter into a recession, and we start to see hardships happen and home values come down some, then those FHA assumable loans will be more feasible to the people who don't have a ton of money," he said to Real Estate News. "And they'll be much more incentivized to take them with rates at 8%."

As with anything, there are some key pros and cons that buyers and sellers should keep in mind when considering an assumable loan arrangement in a home sale or purchase. 

Upsides:

Buyers will save a lot of money in the long term. The whole point of assuming an existing mortgage is being able to take over a home loan that is locked in at a much lower interest rate. A homeowner who purchased or refinanced two years ago at 3% is paying significantly less for their mortgage than someone who may have paid the same price for a similar home today at a 7% interest rate. Over time, these savings really add up. 

Sellers can capture additional value when selling. There's evidence — such as the New York Times profile — suggesting that sellers can actually get a higher sale price if they market an assumable mortgage with their listing. For instance, a listing that Pickett has in Wilmington, North Carolina, is priced about $15,000 above market rate because he believes a buyer will see the value in paying more upfront for a property in order to secure a home with a lower interest rate. "Realtors will say, 'Hey, you know your house is overpriced,' and then I'll say, yeah, but you're picking up $120,000 of buying power," he explained.

There's no need for a loan originator. There are a lot of moving parts to a real estate transaction and a lot of players who have to work together to get their client to the closing table. When assuming a mortgage, there is no loan originator, Pickett said. Instead, the buyer works directly with the existing loan servicer and undergoes the underwriting process with them.

Downsides:

It can be more confusing and require more time than a traditional deal. Pickett said he's experienced a lot of confusion from agents and potential buyers when it comes to assumable mortgages. The math can be particularly tricky as a buyer will have to have enough cash on-hand to bridge the gap between the sale price and the loan balance. And then buyers will also have to be more hands-on in pushing the deal forward with the loan servicer versus a loan originator who has an incentive to close a deal as quickly as possible. Expect closing to take up to 60 days, Pickett cautioned.

You're still paying mortgage insurance if it's an FHA loan. Despite the prospects of long-term savings on a loan with a substantially lower interest rate, buyers who assume an FHA loan will still be paying mortgage insurance. While it may only add another $100 or $200 to the total monthly mortgage payment, it's certainly something that should be calculated in the cost-benefit analysis of purchasing a home with an assumable mortgage.

You may be limiting yourself in a period of already low inventory. Once a savvy buyer understands the concept of assumable mortgages, they may become fixated on purchasing a home with one, Pickett said. And the challenge is that there aren't going to be many options available to buyers. And in other instances, a seller might not view the extra time it takes to complete the process as being worth it. "They may want to wait 60 days for an extra 15 grand," he explained. "Or they may think they're gonna be in multiple offers and still get 15 grand more."