The Mortgage Cheat Code That Could Help You Afford a Home

There are a few reasons why it’s really tough to buy a home in today’s market. For starters, there aren’t very many “for sale” signs up — in fact, according to Realtor.com’s latest estimates, things are officially at crisis levels, with inventory coming up short by 2.3 million to 6.5 million homes. And if you remember the whole supply-and-demand lesson from your high school economics class, then you know where I’m headed next. Houses have jumped in cost, with the median price hitting $416,000, according to the most recent available June 2023 figures from the National Association of Realtors. 

Now here’s where I’ll really sound like a Debbie Downer. In addition to low inventory and high list prices, interest rates are some of the steepest this generation of buyers has witnessed. Rates on a 30-year, fixed-rate mortgage plunged to 2.65% in January 2021. But today they’re at a whopping 7.6%. To put things in perspective, your monthly payment on a $400,000 home loan with the record-low interest rate would have been $1,612 compared to $2,824 if you locked in with today’s rate. Oof. 

So my curiosity was piqued when I read about how some buyers were inheriting their seller’s low interest rates, with the sub-3% interest rates considered hot amenities, just like “marble countertops or a view of the mountains,” as the New York Times puts it.

Known as “assumable mortgages,” this creative financing solution could help buyers financially time travel back a couple of years when rates were at historic lows — but a lot of factors have to be aligned for it to work, mortgage experts explain. 

Typically, when you buy a home from a seller, you get your own mortgage with its own terms, like the interest rate and duration, explains Malcolm-Wiley Floyd, cofounder and CEO at Stairs Financial. By contrast, assumable mortgages are mortgages that a buyer can inherit from a seller after purchase, he says. 

Here’s the catch: Buyers would still have to qualify for the loan they’re assuming. And many of those assumable loans are FHA, VA, or USDA loans, and they have different rules and qualification requirements than conventional loans, Floyd says. 

“Assumable mortgages come with the interest rates they originated with, so when rates go up, they are a good option for buyers looking for lower rates and for sellers looking to increase the appeal of their property,” Floyd says.

More and more prospective buyers are exploring assumable loans to try and combat today’s higher rates, says Chris Birk, vice president of mortgage insight at Veterans United Home Loans. After all, roughly four in five homeowners with mortgages have an interest rate below 5% — and nearly one quarter have rates below 3%, according to figures from Redfin.

Buyers, unfortunately, can’t just waltz into an old loan with a low rate — they’ll also need to pay out the homeowner’s equity at the closing table, Birk says. That’s often done with cash, but buyers may be able to secure a second mortgage to do so.

In some situations, this option could still be more favorable than getting a new loan for the entire amount, Floyd says. But if you go this route, brace yourself for a more complex closing that could also come with extra fees.

The bottom line? Assumable mortgages, unfortunately, are a limited loan product. But if you’re a first-time buyer, you could save money by looking into more widely available first-time homebuyer programs, Floyd says.

“They’re offered by local governments, lenders, and nonprofits and often come with lower interest rates, down payment grants, forgivable loans, and more,” he says.