A Little-Known Way Homebuyers Can Beat High Mortgage Rates

Home prices were already high when Ellen Harper, a software architect living in Atlanta, started looking for a home in 2021. But she couldn’t have predicted the rapid rise in interest rates the following year, and even with a big down payment, the new math made her uneasy.

This year, however, she stumbled upon what appeared to be a portal to the not-so-distant past: listings for thousands of homes that come with low-rate mortgages that can be transferred from the existing owner to a new home buyer. known as an assumed mortgage.

Harper, who is in his 50s, managed to rob one of those homes, closing two weeks ago on a four-bedroom brick colonial in Fairburn, Georgia, with a monthly payment of $1,400. It’s an amount she can comfortably afford until retirement, thanks in large part to a 2.49% mortgage rate. That’s less than half the current rate of 7.09% on 30-year fixed loans, the most popular type of mortgage.

“I didn’t want to have a bad mortgage and be in a ball-and-chain situation where all I could do was pay the mortgage,” Harper said. She found her home through Roam, a start-up that went live in September that lists homes with potential low-rate loans and helps buyers through the process.

“There were other houses – they were nice and all,” she added, “but I went for the lowest price I could find.”

Assuming a mortgage isn’t some kind of gimmick; is a benefit built into certain government-backed mortgages, as long as new homeowners qualify. The process won’t work for every prospective buyer because there are several hurdles they may need to jump through before claiming the keys, often including a hefty down payment. For home sellers, it can be advertised alongside marble countertops to attract more potential buyers.

Many real estate professionals don’t know that assumable mortgages – last popular in the 1980s when mortgage rates reached 18% – are even possible. But as mortgage rates continue to rise, word is getting out. Realtor.com, a home listing site, recently began tagging presumptive properties and making them searchable. And more companies — from small startup operations to start-ups like Roam — are seizing the opportunity, compiling lists or maps of eligible properties and charging owners a fee to help navigate what can be a nerve-wracking guesswork process.

An estimated 12.2 million loans, or 23 percent of active mortgages, are assumable, according to Intercontinental Exchange, a data and technology company, although most conventional mortgages (which represent the majority of existing loans) ) are not. It’s a feature built into mortgages backed by the Federal Housing Administration that are widely used among first-time homebuyers as well as those from the Department of Veterans Affairs.

The number of completed premises represents only a small fraction of home sales, but it is growing. More than 6,000 were completed in 2023, an increase of 139% compared to 2022. This year, 3,896 premises have already been completed.

Many homeowners with low-rate loans probably aren’t ready to give them up yet: Nearly two-thirds of mortgages taken out at rates below 4% were taken out in the past three and a half years, according to Intercontinental Exchange.

Several stars need to align when trying to take on a mortgage. Given that the price of many homes has appreciated quickly and assumed loans have been partially paid off, there may be a significant difference between the purchase price and the remaining mortgage. This means potential homebuyers may need hefty down payments, or at least be able to qualify for a second mortgage, which will have a much higher rate.

Another hurdle is finding a seller willing to accept such an offer and hoping that the mortgage servicer holding the loan – who receives much less than for a typical new mortgage – will process the assumption in a timely manner.

Several new companies are trying to make the process easier, including Roam, which recently received $3 million in an investment led by venture capital firm Founders Fund and Tony Xu, chief executive of DoorDash, among others.

Roam runs a site similar to Zillow, except all listings, currently in 18 cities across seven states, have mortgages assumed below 6% and are large enough to cover at least half the purchase price.

The company teamed up with real estate agents with knowledge of credits available in the markets where it operates. Your transaction coordinators will call the mortgage servicer – the company that manages the loan – until the deal closes. Roam’s help doesn’t come cheap: It charges 1% of the home’s sales price — for example, $4,500 on a $450,000 home. Buyers only pay if the deal closes.

In Ms. Harper’s case, her broker submitted her offer five different times because the seller and her listing agent were quite skeptical. That’s when her real estate agent, Kevin Hosner of Chapman Hall Realtors in Atlanta, got creative. They promised to pay the seller $2,000 more if they didn’t close within 60 days. Roam used this as inspiration for a new guarantee: If the assumption isn’t processed within 45 days, the company will pay the homeowner’s mortgage pro-rata until it does. Ultimately, Harper paid $357,000, with a down payment of approximately $170,000.

“Just because it’s assumed, technically, doesn’t necessarily mean the seller is so willing to do it,” Hosner said. “It’s not as fast as a cash offer that will close in two weeks.”

Mr. Hosner, who was previously a church pastor, has completed dozens of presumptive transactions and has a preacher’s passion for spreading the word about his availability. But not all agents want to be bothered with the extra headaches, and many buyers have run into problems with mortgage servicers or lenders processing the assumptions. Assumed mortgages can take 45 to 90 days or more to close, while buying a home with a new mortgage typically takes a month to 45 days in many parts of the country, mortgage brokers said.

“The military has been very reluctant to do them,” said Ted Tozer, a nonresident fellow at the Urban Institute’s Housing Finance Policy Center. “In fact, they are losing money on each of them because they have substantial costs that are not covered by the rate they can charge.”

Both the Federal Housing Administration and the Department of Veterans Affairs have limits on how much mortgage servicers can charge for assumptions.

For buyers, looking for low-rate mortgages may seem like a no-brainer. But there’s a lot to consider, including the prospect of qualifying for a second mortgage, something that could derail the closing process or end the deal altogether.

Raunaq Singh, chief executive of Roam, said the uncertainty of getting a second loan was a frequent obstacle – some mortgage servicers who held the presumed loan would extend additional credit, but not always. To address the issue, Roam recently began working with Spring EQ, a national lender, which will provide second loans to Roam customers with credit scores of at least 640 and down payments of at least 15 percent.

“Now they can buy any house without worrying,” Singh added.

Imagine a house that costs $400,000 that comes with an assumable mortgage of $280,000. The homebuyer would need to shell out $120,000 to fill the gap, either with cash or loans. A buyer who puts down 20%, or $80,000, still needs another $40,000, plus closing costs.

Here’s how the math works: A homebuyer’s total monthly payment would be $1,761, compared to $2,237 a month for a new mortgage with a rate of 7.5%. That includes an assumed mortgage payment of $1,230 (at a 3% rate) and a second loan of $336 (at a 9.5% rate), according to Roam’s calculations.

There’s another ongoing cost to the monthly payment: With FHA loans, the homebuyer would also need to pay a $194 mortgage insurance premium, which is a fee under the FHA program to cover the lender’s losses if the borrower defaults.

Mortgage insurance generally covers the risks associated with a low down payment. But here, even borrowers who invest a lot of money will have to pay the fee – probably 0.8% of the loan balance every year, which is split and paid monthly – over the life of the loan, although there are exceptions.

People taking out VA loans must pay a one-time fee of 0.5% of the loan amount to the agency, but there are no ongoing insurance costs. There are other limitations, however. If a non-veteran buyer assumes the mortgage, the seller may lose all or part of their entitlement to another VA loan until the old one is paid off.

Still, for many potential buyers, it’s worth it.

Ryan Carrillo was one of many homeowners who wanted to move but didn’t want to give up their 2.75% mortgage. After he learned his FHA-insured mortgage was assumed, he realized he could try to find another one. But he quickly became frustrated trying to find presumptive listings.

“I thought to myself, ‘We’re in a world where the underlying mortgage is more valuable than the property – surely there must be a way to do something with it,’” he said.

This led to an idea he shared in a text message to an entrepreneur friend, Louis Ortiz. In August, the two launched Assumable.io, a small local operation. It now includes a website with 26,000 active listings and charges $1,850 to help would-be borrowers through the process Carrillo is about to begin for his own family. He and his wife, who had their first child in January, are moving from Phoenix to Texas to be closer to family.

He’s not planning on passing on his mortgage to the buyer – he’s worried it will take too long to complete given his impending move.

The mortgage he’s taking on has a rate of 4.87%, which translates into savings of more than $400 per month, compared to a new 7.12% loan he was quoted.

“The assumptions are a time machine relative to past low rates,” Carrillo said. “As I ran the numbers,” he added, “it was obvious.”