The 3% Mortgage Hiding Inside The House

<p>When buyers tour a home, they usually evaluate the kitchen, bedrooms, neighborhood, backyard and asking price.</p><p>But today, the most valuable feature of a home may be something you cannot see.</p><p>It may be the seller’s mortgage.</p><p>The national average for a new 30-year fixed mortgage is approximately 7.5%. But millions of homeowners purchased or refinanced when rates were between 2% and 4%.</p><p>What if a buyer could purchase the house and take over that existing low-rate mortgage?</p><p>That is called a mortgage assumption.</p><p>Instead of obtaining an entirely new loan at today’s rate, a qualified buyer may be able to assume the seller’s remaining loan balance, interest rate, monthly payment and repayment term.</p><p>Not every mortgage can be assumed. Most conventional mortgages generally cannot. But FHA-insured mortgages are assumable, and certain VA and USDA loans may also be assumed, subject to their individual requirements.</p><p>At first glance, this sounds like a homebuyer’s dream.</p><p>Why borrow money at 7.5% when you may be able to borrow it at 3%?</p><p>But—as always—the details matter.</p><p>The buyer must generally qualify. The loan servicer must approve the assumption. The buyer receives only the seller’s remaining mortgage balance, not enough money to automatically purchase the entire house.</p><p>If the home is worth $600,000 and the seller owes only $350,000, the buyer must still cover the $250,000 equity gap—plus applicable closing costs.</p><p>That money may come from cash, the sale of another home, a second mortgage or some combination of those sources.</p><p>A 3% first mortgage combined with an expensive second loan may still be a good transaction—but the decision must be based upon the blended cost of the entire purchase, not simply the beautiful 3% headline.</p><p>VA assumptions introduce another important issue: the seller’s release from liability and restoration of the veteran’s entitlement. A transaction can close, yet the seller’s VA entitlement may remain connected to that mortgage if the assumption is not properly structured.</p><p>We also need to distinguish a legitimate mortgage assumption from purchasing a property “subject to” an existing mortgage.</p><p>With a formal assumption, the lender or loan servicer approves the qualified buyer and transfers responsibility under the established process.</p><p>In a subject-to transaction, the title may transfer while the mortgage remains in the seller’s name. That c