The Resurgence of Assumable Mortgages: A Solution for Homebuyers in a High-Rate Market

The Resurgence of Assumable Mortgages: A Solution for Homebuyers in a High-Rate Market

As mortgage rates linger around the 6% mark, many prospective homebuyers are reminiscing about the dip to 3% that marked the years 2020 and 2021. This yearning for lower rates has driven an increase in interest in an often-overlooked financial tool—assumable mortgages. These specialized mortgage options allow buyers to take over an existing mortgage, potentially locking in rates beneath current levels, which is particularly alluring in an environment characterized by elevated borrowing costs.

Since 2022, there has been a notable uptick in Google searches for “assumable mortgage,” highlighting an increasing awareness and curiosity among consumers. This growing trend can be attributed to a combination of factors, including the stagnant mortgage rates and the desire of buyers to mitigate costs associated with higher interest rates. Historically, assumable mortgages were more commonplace in the 1970s and 1980s, offering a viable avenue for home purchasing. However, legislative changes have significantly diminished their prevalence in the modern market.

The Garn-St. Germain Depository Institutions Act, enacted in 1982, was a pivotal moment for assumable mortgages. This legislation enabled lenders to impose due-on-sale clauses, thereby requiring the entire balance of an existing mortgage to be paid in full when a property changes hands. Consequently, this shifted the landscape, rendering assumable mortgages nearly obsolete except in limited circumstances, such as divorce or inheritance. Despite this historical setback, certain types of mortgages—specifically those backed by Veterans Affairs (VA), the Federal Housing Administration (FHA), and the United States Department of Agriculture (USDA)—retain their assumable characteristics.

Data reveals a curious pattern in the realm of assumable mortgages. While only a small segment of the housing market offers these loans, Raunaq Singh, the founder of Roam, estimates that approximately 20% to 25% of homes currently listed for sale can be fully assumed. Yet, despite this potential, actual transactions involving mortgage assumptions remain relatively low. In 2023, just 4,052 FHA-backed assumptions were finalized, though this represents a commendable 59% rise compared to numbers from 2021. The VA has seen an even more remarkable increase, with a staggering 713% rise in assumptions within the same time frame.

Looking ahead to 2024, both the FHA and VA appear to be on track to surpass their previous year’s totals in assumption transactions, with over 5,000 assumptions recorded for each program so far. This resurgence in interest signifies a potential shift in how buyers approach home purchasing in a high-rate environment. The psychological comfort of securing an assumable mortgage might be the ladder that many homebuyers need to climb into a competitive housing market.

While assumable mortgages may seem like a relic of the past, their renewed appeal in today’s economic climate indicates a shift towards practical, financially sound choices in home financing. Homebuyers willing to explore this option may find that an assumable mortgage could be a strategic move in pursuit of affordable housing.

Real Estate

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