Real estate crisis: how to get a lower mortgage rate

With mortgage rates continuing to hover between 7% and 8%, it has been challenging, yet impossible, for many homebuyers to enter today’s housing market. High monthly prices, coupled with a lock-in effect in which homeowners are reluctant to give up their sub-4% mortgage rates, have prolonged the frozen housing market.

But there is a little-known trick to get a lower rate: assumable mortgages. Earlier this month, Roam, a company that specializes in helping buyers find homes with mortgages under 4% they can afford, announced a new feature where buyers can purchase a home with a 2% mortgage. included and a down payment as low as 15%.

Assumable mortgages allow the buyer to purchase a home by assuming the current seller’s mortgage loan. They are available on all government-backed loans; FHA and VA loans are eligible by law, and make up about a third of mortgages in the U.S. While trying to get one of these low-rate mortgages may seem like a no-brainer for new homeowners, mortgages Affordable values ​​have historically been difficult to achieve. both in terms of availability and accessibility.

“There have been two reasons why the volume of assumptions has not been the same as that of a purchase loan,” says Raunaq Singh, founder of Roam. Fortune. One is that “sellers often took six to nine months to close, (and two) buyers needed a hefty 35% down payment.”

By assuming a mortgage, the seller is completely released from the mortgage, making the new buyer fully responsible for the mortgage. The buyer also has to cover the seller’s equity in the home, meaning he has to pay the difference between the purchase price and the seller’s outstanding mortgage balance at closing, according to Roam.

“In general, loan assumptions can be difficult for first-time buyers to navigate because they will need enough cash or secondary financing to pay off the equity in the home,” Chris Birk, vice president of mortgage knowledge and director of education at Veterans United Home. Loans, says Fortune.

But Roam’s new product feature helps buyers with the down payment by allowing them to browse listings and determine the blended rate (the old market rate and the new rate) and monthly payments based on how much they can actually o They want to pay for the house. . For example, a buyer interested in purchasing a $400,000 home could use Roam Boost to put a 20% down payment on a home with an interest rate of 4.3%, according to Roam. That would save them more than $500 a month, assuming today’s higher mortgage rates. Roam also guarantees a 45-day closing, which is much faster compared to other mortgage assumptions that can take months to complete.

Their “seller guarantee tells sellers that we will close in 45 days or we will pay their mortgage until we close,” Singh says.

How common are assumable mortgages?

While Roam’s announcement this month sparked more conversation about assumable mortgages, they are still relatively uncommon in the lending world. This is because most loans in the US do not qualify to become an assumable mortgage that is privately backed rather than government managed.

“For many people, this isn’t even an option to consider, but there’s definitely a lot of curiosity and misinformation surrounding its availability,” says Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage. Fortune. “This conversation always seems to come up when we’re in a rising rate environment.”

In fact, over the past few years, mortgage rates have risen from a low of 3% to a high of 8% last fall. Additionally, home buyers looking for assumable mortgages should remember to get approved for the loan, just as they would for a new one.

However, interest in assumable mortgages only continues to increase in the current real estate market.

“FHA and VA loan assumptions more than doubled in 2023 from the previous year. Interest in VA mortgage assumptions has increased over the past two years,” says Birk. However, “buyers will have to account for the equity in the home. Prospective buyers who accept a loan often pay the equity in the home in cash. “That could mean bringing tens or even hundreds of thousands of dollars to the closing table.”

What do assumable mortgages mean for lenders and banks?

Although loan assumptions basically take over an existing mortgage, it might seem like a bad deal to lenders.

“There is a fear that (assumable mortgages) could be harmful because lenders want their mortgages to be a reflection of the current rate environment so that they make sense for them,” Alvarez says. “At the end of the day, (mortgage lending) is a business, and banks don’t always want to lend at significantly below market rates.”

And while there isn’t much light at the end of the tunnel in terms of mortgage rates falling, they will eventually fall a bit.

“When rates go down, no one would choose to take on a mortgage with a higher rate,” Alvarez says.

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