Is an Assumable Home Loan Right for You? Expert Q&A

Lock in a below-market mortgage rate

Missing out on the all-time low, pandemic-era interest rates can be very disheartening for any home buyers staring at today’s rates.

Good news: assumable mortgages provide a way for borrowers to transfer their existing home loans — including terms, balance and repayment period — amongst each other. Though the biggest benefit, by far, is being able to take over an interest rate well below the market average, according to Clever Real Estate’s Steve Nicastro.

We spoke with Nicastro about the particulars of the loan type, as well as the pros and cons, and requirements to attain one.

In this article (Skip to...)

• How assumable loans work
• Requirements
• Assumable mortgage pros
• Investment properties
• Assumable mortgage cons

Meet the expert

Steve Nicastro is a licensed real estate agent and the content team lead at Clever Real Estate. Using his real-world experience as a real estate agent and investor, he’s Clever’s authority on finding a realtor, rent-to-own homes, selling to cash buyers, real estate investing, and preparing to sell a house.

Nicastro shared his thoughts on how assumable loans work and how they can help first-time home buyers lock in a low mortgage rate in a Q&A with The Mortgage Reports. Answers have been edited for brevity and clarity.

How do assumable mortgage loans work?

Instead of a buyer having to get qualified for a new mortgage at market interest rates, they assume the seller’s current mortgage. Therefore, they become responsible for taking over the monthly payment, the mortgage’s remaining loan balance, and adhering to all of the existing terms.

Not all mortgages are assumable, and the buyer needs to meet the lender’s qualification criteria, and likely needs to go through an underwriting process (credit check, income verification, etc.) The buyer is also usually responsible for paying the difference between the home’s purchase price and the remaining mortgage balance, similar to making a down payment on a new loan.

What requirements, qualifications and restrictions do assumable mortgage loans have?

This is going to vary widely depending on the loan type and the lender. The biggest restriction to be aware of is conventional loans DO NOT qualify to be assumable. Loans that do qualify include gov’t backed loans: FHA loans, VA loans, and USDA loans.

Individual lenders set their own eligibility and criteria so it’s important for the buyer or seller to contact the lender to check if the mortgage is assumable, and if so, what criteria needs to be met for the loan to be assumed.

What are the assumable mortgage pros for borrowers?

The biggest benefit, by far, is the lower rate the buyer would inherit (and lock in) from the seller, as it can literally save the buyer thousands of dollars per year in interest savings.

For example, if you’re in the market for a home now, 30-year fixed mortgage rates averaged 6.39% as of May 4, according to Freddie Mac. Rates are the highest they’ve been since before the 2008 crash. But they ranged from between 3% and 4% for most of 2011-2021.

So if you buy a home and assume the seller’s mortgage, and the seller locked in a low rate between that timeframe, you could save a ton of money on interest.

For example, a borrower with a $300,000 mortgage and 6.5% interest rate pays $1,896 per month for principal and interest. They end up paying a total of $682,633 over the course of that 30-year fixed mortgage. That same mortgage with a 3.5% rate would drop the monthly principal and interest to $1,347 and the total paid over 30 years to $484,966.

The second example that assumes the mortgage results in massive savings of $549 per month and a total payment and interest savings of $197,668.

Could assumable mortgage loans work for investment properties?

Assuming a mortgage is especially beneficial for a buyer who is purchasing the home as their primary residence, but plans to eventually move out and turn their house into a rental property (also known as house hacking).

Instead of securing a home loan with an investment property rate now (which can be 8%+), they can potentially get locked into that 3-4% rate for a 30-year period, live in the house for a few years as a primary residence, then move out and rent it out while keeping the same mortgage rate and terms. The impact on the property’s future cash flows and ROI is enormous. It can mean the difference between a negative cash flow property, and earning hundreds in cash flow per month.

Likewise, an investor who is buying an investment property can try to assume an investment property mortgage now and potentially secure a lower rate. The last time I checked, investment mortgage rates are around 7-8%, whereas in 2017-19 I locked in rates just over 5% on my rental properties.

What are the assumable mortgage cons for borrowers?

Limited availability and options. The seller has to be offering it up as an option or at least be open to the idea. If they haven’t offered, you’d have to convince the homeowner and they may not be willing to do it.

As noted above, conventional mortgages don’t qualify and most mortgages are conventional ones.

Another stumbling block is coming up with the “down payment.” In this case, that means the difference between the home’s purchase price and the remaining mortgage balance. This could be a lot of money, since home prices have appreciated greatly since 2020.

Buyers may also be assuming a loan that carries private mortgage insurance (PMI) payments, which may partly offset the interest rate savings.

What's in it for the borrowers giving up the loan?

Sellers might not realize just how valuable their assumable mortgage is. The risk is allowing a buyer to assume their mortgage without negotiating a better sale price or terms on their home sale. See the above example: A $200,000 lifetime savings for a 3.5% rate mortgage vs. 6.5%. That could be a valuable bargaining chip for sellers to leverage.

Contact your lender to find out if your mortgage is assumable and what will be required from the new borrower as far as qualification criteria, underwriting and fees. If it’s an option, you may be able to fetch a higher price AND sell your house quicker because of this strategic advantage you have over the competition.

The bottom line

While high interest rates strain affordability in an already challenging housing market, you always have ways to lock in a lower rate. Assumable mortgages present borrowers with a great option that not everyone is familiar with.

If you’re ready and prepared to buy a home, reach out to a local lender and real estate professional to get started.