The 3% Mortgage Hiding Inside The House

When buyers tour a home, they usually evaluate the kitchen, bedrooms, neighborhood, backyard and asking price. But today, the most valuable feature of a home may be something you cannot see. It may be the seller’s mortgage. The national average for a new 30-year fixed mortgage is approximately 7.5%. But millions of homeowners purchased or refinanced when rates were between 2% and 4%. What if a buyer could purchase the house and take over that existing low-rate mortgage? That is called a mortgage assumption. Instead of obtaining an entirely new loan at today’s rate, a qualified buyer may be able to assume the seller’s remaining loan balance, interest rate, monthly payment and repayment term. Not every mortgage can be assumed. Most conventional mortgages generally cannot. But FHA-insured mortgages are assumable, and certain VA and USDA loans may also be assumed, subject to their individual requirements. At first glance, this sounds like a homebuyer’s dream. Why borrow money at 7.5% when you may be able to borrow it at 3%? But—as always—the details matter. The buyer must generally qualify. The loan servicer must approve the assumption. The buyer receives only the seller’s remaining mortgage balance, not enough money to automatically purchase the entire house. If the home is worth $600,000 and the seller owes only $350,000, the buyer must still cover the $250,000 equity gap—plus applicable closing costs. That money may come from cash, the sale of another home, a second mortgage or some combination of those sources. A 3% first mortgage combined with an expensive second loan may still be a good transaction—but the decision must be based upon the blended cost of the entire purchase, not simply the beautiful 3% headline. VA assumptions introduce another important issue: the seller’s release from liability and restoration of the veteran’s entitlement. A transaction can close, yet the seller’s VA entitlement may remain connected to that mortgage if the assumption is not properly structured. We also need to distinguish a legitimate mortgage assumption from purchasing a property “subject to” an existing mortgage. With a formal assumption, the lender or loan servicer approves the qualified buyer and transfers responsibility under the established process. In a subject-to transaction, the title may transfer while the mortgage remains in the seller’s name. That can leave the seller liable for the debt and potentially create serious contractual and legal problems. Today, Cory Edge will explain how buyers and agents can identify homes with assumable loans—and how a seller can turn an existing low mortgage rate into a powerful marketing advantage. Dwight Millard will explain the qualification process, monthly-payment savings, the equity-gap problem and the special considerations surrounding FHA and VA assumptions. And I want to answer the ultimate financial question: Is the buyer getting a tremendous mortgage—or using so much cash to capture that mortgage that the rest of the financial plan is placed at risk? The next great real-estate bargain may not be hidden in the price of the house. It may be hiding inside the mortgage. This is The Jon Sanchez Show.