Although FHA fees have gone up and VA funding fees have increased, these loans have built-in value that many buyers wouldn’t naturally think about… they are assumable. A few years from now, homeowners who have purchased with an FHA or VA loan may be at an advantage for having born those extra expenses.
What is an Assumable Loan?
An assumable mortgage allows a buyer to assume the rate, repayment period, current principal balance and other terms of the seller’s existing mortgage rather than obtain a brand-new mortgage, as long as the lender approves the buyer.
Both VA and FHA loans are assumable and may very well be an asset in the future, when interest rates are almost certain to be higher. Interest rates have reached new lows in the last year, after a long downward trend, and are now on the rebound. Still below 5%, we are expecting a continued climb as the economy recovers.
One of the great features of FHA and VA loans is that qualified buyers can assume the loan. (Those originated since 1989) The buyer signs an agreement to pay the debt and becomes the “substitute” borrower. This aspect of a loan hasn’t been of much value in the last 6 years, since interest rates were falling. But in an environment where interest rates are rising, the assumable loan will be a selling feature to someone who qualifies.
Assumable loans have future value for buyers in a market with rising interest rates. The only issue is that the buyer must have cash to cover the amount between the purchase price and the loan balance. An assumable loan is usually not ideal for a cash-strapped buyer.
How Quickly Will Interest Rates Rise?
Mortgage experts have been calling for rising interest rates since then end of 2012, but we didn’t see it happen until this year. Rates continue to hover just under 5%. The historic low was November 2012, with rates around 3.31%.
According to Frank Nothaft, chief economist with Freddie Mac:
“By the end of 2014, rates will probably approach and perhaps touch 5%. A reason we see the uptick in rates is that I do think some point the Federal Reserve will start to taper and scale back its very active purchase on long-term Treasuries and mortgage-backed securities.”
Today’s rates are still historically low, considering the average interest rate over the last 50 years is between 7% and 8%. These rates are still low enough to be attractive to a future buyer who can assume the loan.
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