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Sky-high interest rates have made it more expensive than ever to buy a home. Find out how one startup will use assumable mortgages to resuscitate low-cost home loans.
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A couple of years ago, every new week seemed to bring new record low mortgage rates. As the COVID-19 pandemic hammered businesses, the Federal Reserve tried to stimulate the economy by cutting the cost of borrowing. That meant the average 30-year fixed-rate mortgage hit a record low of 2.67% in December 2020, according to Freddie Mac data.
The picture is very different for today’s home buyers. Top mortgage lenders are offering rates of 6% or 7% on the same 30-year mortgage. Indeed, a recent Redfin report said the median mortgage payment had reached a monthly high of over $2,600, making it “more expensive than ever to buy a home.”
What’s all this about a 2% mortgage rate?
A new startup called Roam wants to use a little-known aspect of home loans called an assumable mortgage to make buying a home more affordable. Assumable home loans essentially mean a seller can transfer an existing mortgage to the buyer at the existing rate. The company’s site boasts potential mortgage rates that are as low as 2%. Unsurprisingly, there are a lot of caveats to that, which we’ll get into shortly.
Overall, Roam reckons assumable loans will help home buyers “wind back the clock and purchase their home with a low-rate mortgage included.” The idea is that if you bought when rates were at record lows, you could potentially sell both the property and the low mortgage rate. Roam’s thinking is that sellers can get more interest and a better price for their property, while buyers can dramatically reduce the cost of homeownership.
If Roam can popularize assumable loans, we are talking about hundreds of thousands of dollars in potential savings for home buyers. Let’s put aside factors like down payments, closing costs, and eligibility for a second. Here’s how that difference might look on home loan of $375,000 for a 30-year fixed-rate mortgage:
The scenario above somewhat over simplifies the potential savings. If you’re buying a home with an assumed mortgage, you’d only be able to get a low rate on the existing mortgage balance for the remaining term. Perhaps the home you’re considering buying costs $450,000 and the current owners owe $250,000 on their mortgage. You’d still need to pay $200,000. That might take the form of a down payment combined with a second mortgage at a higher rate.
In that situation, if you could swing a down payment of $75,000 and a rate of 6% on your second mortgage, your costs on a $375,000 total loan might look like this:
Don’t get too excited
Before you rush out and start celebrating the return of low rates, let’s look at some of those caveats. The biggest is that a 2% rate is low, even for the heady low-mortgage days of 2020. We used a rate of 3% in our calculations above. That’s more realistic, but the seller’s rate could be even higher: Roam says it will work with sellers whose mortgage rate is less than 5%.
Moreover, assumable loans are not common and come with a lot of red tape. Not all mortgages qualify, and Roam won’t be an option for every home buyer. Here are some of the other restrictions:
It only applies to FHA and VA loans: Roam says, “Any homeowner that financed their home purchase with an FHA or VA loan and has a mortgage rate below 5% is eligible.” Many home buyers may qualify for FHA loans, which are guaranteed by the government and are often easier to get for than traditional mortgages. However, for the most part, only active members of the military or veterans can qualify for a VA loan.Mortgage lenders won’t be in a rush to process the loans: According to The Wall Street Journal, there’s not a lot of profit in it for lenders in the assumable loan market. As a result, they may be slow to process the paperwork.Roam only operates in five states: It is early days, but Roam is starting out in five states. If you don’t live in Georgia, Arizona, Colorado, Texas, or Florida, you won’t be able to use Roam’s services.You’ll still need to pay fees and closing costs: There are always closing costs involved in home loans, but they are usually calculated on the loan, not the value of the home. Roam charges a fee of 1% of the property purchase price. So in the $450,000 home we looked at above, the buyer would pay $4,500.
Bottom line
Roam promises to help buyers in the states it operates in by finding available properties, dealing with the paperwork, and managing the process with everybody involved. If you’re a potential home buyer in one of the states where Roam is active, why not see what the company could do for you?
When things sound too good to be true, it’s often better to give them a wide berth. In this case, Roam’s offer isn’t quite as good as it sounds. But for certain buyers, it could still generate significant savings. Put simply, it’s worth looking into any ways to reduce the eye-watering costs of buying a home in today’s market.
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