In recent months, homebuyers in the United States have been grappling with mortgage rates hovering around 6%. This has stirred up feelings of nostalgia as they remember the remarkably low 3% rates that characterized the housing market in 2020 and 2021. The rising interest rates have not only impacted affordability but have also prompted potential buyers to explore various financial strategies, one of which is the assumable mortgage. This type of mortgage allows a new buyer to inherit an existing mortgage, potentially capitalizing on significantly lower rates that may have been set years ago.
Historically, assumable mortgages were quite common during the 1970s and 1980s, offering a pathway for buyers to circumvent rising interest rates. However, the passage of the Garn-St. Germain Act in 1982 shifted this landscape. The Act enabled lenders to enforce due-on-sale clauses, essentially nullifying most assumable mortgages unless specific exemptions apply. Consequently, the concept of assuming a mortgage faded from mainstream discussions, leaving many homebuyers unaware of its existence, despite its benefits.
Interest in assumable mortgages has recently surged, particularly as prospective buyers become more aware of their potential advantages. A notable spike in Google searches for “assumable mortgage” was observed in May, reflecting an increasing curiosity as borrowers attempt to navigate a challenging financial terrain. As Raunaq Singh, founder and CEO of Roam, correctly points out, around 20% to 25% of homes on the market are likely to feature assumable mortgages at any given time. Despite this, the actual number of transactions remains significantly lower than expected.
This gap between potential and execution might be attributed to a lack of awareness among homebuyers and real estate agents regarding which loans are assumable and how to navigate the complexities involved. Even in the realm of government-backed loans, such as those from the Veterans Affairs (VA) and Federal Housing Administration (FHA), the figures illustrate a dramatic uptick in mortgage assumptions, with notable increases of 59% for FHA and a staggering 713% for VA loans from 2021 to 2023.
While the data suggests an awakening interest in assumable mortgages, the reality is that only a fraction of buyers are capitalizing on this opportunity. In 2023, there were only 4,052 FHA-backed mortgage assumptions, despite the increase from previous years. The advantages of lower rates coupled with the current high-rate environment present a unique opportunity for buyers willing to delve into the specifics. However, the challenge for many lies in the knowledge gap about how to initiate this process.
As 2024 progresses, the trend of rising assumable mortgages indicates a potential shift in the housing market landscape. Depending on the economic climate and the trajectory of interest rates, homebuyers may find that assumable mortgages provide a practical strategy to mitigate costs. For those keen on exploring this avenue, staying informed and working with knowledgeable real estate professionals will be critical to navigating this complex financial option.