Mortgage rates have doubled during the past year, and it’s making it harder to buy a home. The payments are higher, and some applicants don’t qualify for a loan because a lender will look at their potential monthly payment compared to whatever their income is.  

Assuming an existing mortgage at a lower rate can let you avoid the adverse effects of higher rates. A buyer who assumes a mortgage might see a rate that begins with a three or sometimes even a two if the loan originated in 2020 or 2021 when the interest rates were at all-time lows.

Most mortgages aren’t assumable, so it’s not an easy option. Still, if you are a buyer seeking out this type of loan, you could see very low rates, even though financing costs are around a 20-year high otherwise.

So what exactly is an assumable mortgage?

The Basics of an Assumable Mortgage

Most government-backed mortgages are assumable, including the ones backed by the FHA, the USDA, and the VA. The rules vary depending on the type of government-backed mortgage.

An assumable mortgage lets you move into the seller's former home and their loan. If you're the new owner, the remaining balance of the loan, the repayment schedule and the rate are taken over by you.

When rates are high as they are now, assumable mortgages become especially appealing to buyers. They can save thousands if they take over a home loan that someone got, say, a year or two ago.

You could save several percentage points on your rate.

Again, only government-backed mortgages qualify, but you have to keep in mind that as well as taking on the remaining debt of the home, you will have to pay off the difference between the balance of the mortgage and the current value of the house. You could require a second mortgage to make that happen.

Assumable mortgages have an interest rate and payment period that stay the same, so if the home seller has a 30-year mortgage that is three years old and you assume the loan, you have 27 years to pay off the mortgage. The name on the documentation of the mortgage changes while everything else stays the same.

How Do You Assume a Mortgage?

If you’re going to assume a mortgage, you have to get the lender's approval. You're taking a significant risk if you informally enter into an assumption without telling the lender. For example, if the lender finds out in this scenario, it can demand that you make the full payment of the loan amount immediately. If the loan remains in the seller's name, then the seller is responsible for the debt.

When an assumption is done correctly, a borrower has to go through the same steps they would to get a new loan. The loan servicer will assess the borrower’s financial and employment information and credit report. The lender will release the liability of the original borrower for the debt.

Assuming a $200,000 balance on a mortgage, and the home is now worth $450,000, you’d have to work out how and when you’ll pay the difference with a seller. A seller can require you to pay the money upfront.

You can find assumable mortgages by searching available listings, and they’ll have this as a selling feature.

For sellers, an assumable loan can make a home more marketable in the face of rising interest rates, and the seller has more negotiating power regarding the price.

For buyers, the advantages include a lower interest rate and closing costs because it costs less to assume a loan than to get an entirely new mortgage.

Disadvantages for buyers include a larger down payment, and the FHA has criteria to meet to assume a mortgage that includes credit and income requirements.

Assumable mortgages aren’t for everyone and aren’t always easy to come by, but they can have unique benefits, particularly in an environment like the one we’re in currently, where interest rates are so much higher than they were at the start of 2022.