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 just this year, after a long downward trend, and are at historic lows.
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 few years, since interest rates were falling. But in an environment where interest rates start 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 Do Interest Rates Rise?
Mortgage experts are always warning about rising interest rates, but we really can’t know. We typically see that as the economy recovers, interest rates start to rise, but this last few years has truly been an anomaly.
According to Freddie Mac:
Freddie Mac is also forecasting a modest rise in interest rates bringing a slowdown in originations, however its total originations prediction comes in lower than Fannie Mae. Freddie Mac forecasted the 30-year fixed-rate mortgage to be 2.9% in 2021 and 3.2% in 2022.
“Entering 2021, we anticipate a modest rise in rates that will likely affect refinance originations, which are coming off a remarkable year. We therefore forecast total originations to decline slightly to $3.3 trillion but remain strong this year,” said Freddie Mac Chief Economist Sam Khater.
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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