This One Thing Can Get You a Low Mortgage Rate Right Now

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Mortgage rates have more than doubled since the beginning of 2022, but you still may be able to find one with a low rate — if you know where to look. Here’s how. 

It’s not just that home prices are significantly higher than they were a few years ago. Rising interest rates have done even more than higher prices to hurt home affordability. Even without the price increases, the average payment on a $400,000 mortgage at the current 6.87% average 30-year interest rate is $2,626, as compared with about $1,686 for a loan of the same amount in January 2022 before rates started to spike higher.

While we can’t exactly go back in time to the days of sub-3% mortgage rates, you might be able to do the next best thing — take over the mortgage of someone who bought with a low rate. This might sound too good to be true, and to be fair, it isn’t possible in all situations. But it’s more practical than you might think.

An assumable mortgage can make your home purchase much cheaper

Some of the most popular types of mortgages are assumable. In a nutshell, an assumable mortgage means that when a home is sold, the buyer can simply take over the seller’s existing mortgage instead of needing to get a new one. They agree to pay the remaining balance and get the exact same interest rate the seller had.

In order to assume a mortgage, a buyer needs to meet the mortgage lender’s requirements just as if they were applying for a new mortgage. But to put it mildly, assuming someone else’s mortgage can save you a lot of money when rates are high.

It’s also worth mentioning that contrary to when you obtain a new 30-year mortgage, when you assume a loan, you pick up where the seller left off. In other words, if the seller owned the home for six years and has 24 years left on their mortgage, so will you. Getting an assumable mortgage can result in you owning your home free and clear faster.

A few caveats

The biggest caveat to mention is that conventional mortgages are not assumable. In order to be able to take over an existing mortgage, it generally must fall into one of the three major government-backed categories: FHA, VA, or USDA loans.

FHA loans are assumable as long as the buyer can meet the FHA’s qualification requirements, such as a 580 credit score and a debt-to-income ratio of 43% or less. VA loans can be assumed even if the buyer wouldn’t be eligible for one on their own. And USDA loans on rural properties can be assumed by a buyer that meets the lender’s requirements.

Another big caveat, which can be a limiting factor for many borrowers, is that you’ll still need to pay the difference between the assumable mortgage amount and the selling price. In other words, if you buy a home for $400,000 and assume a VA loan with a $250,000 balance, you need to come up with the other $150,000 to complete the sale.

Finally, an assumable mortgage is an excellent asset for a seller to have, and it makes it significantly easier to sell a property. Sellers know this. Therefore, the asking price on the property might be quite a bit higher than if it didn’t have an assumable loan attached to it.

The bottom line

An assumable mortgage can make your next home purchase significantly more affordable. As you might imagine, assumable mortgages are a major selling point and make homes extremely attractive to buy, so they can be difficult to find. But if you’re discouraged by today’s relatively high mortgage rates, it can be well worth the time it takes you or your real estate agent to search for one.

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