All FHA loans are assumable – which means that the borrower can transfer their mortgage to another person, so long as the FHA approves of the new homeowner.In contrast, most conventional loans offered by banks or mortgage companies are not assumable; the loan must be repaid in full for the borrower to be released from its terms. Assumable loans are an asset for buyers when interest rates are rising, as they can simply take over the current homeowner’s existing mortgage rather than pay the presumably higher rate they’d get on a new mortgage.Because of the savings you could offer a potential buyer, you might even be able to command a higher asking price for your home. That is why an FHA loan taken out today, when rates are at or near historic lows, might have special value down the line if interest rates increased as many predict they will.
The value of an assumable mortgage comes from two sources: 1) the difference between day’s going rates and the existing mortgage’s interest rate, established weeks or years prior; and 2) how much in closing costs a new borrower would have to pay to get a new loan.For example, if a borrower was looking to purchase a $200k home when the market was charging 6%, being able to assume an older FHA loan at 4% could save them $22,533.66 over the life of the loan.The numbers can seem a little staggering at first, but if interest rates were to rise in the future, FHA loans could become that much more valuable to prospective buyers.In most cases, the seller does not get to pocket the full assumption value of the loan.Usually the savings will be split between the buyer and the seller, though the exact amounts have to be worked out through negotiation.
There are a few downsides to assumable loans, starting with the difficulty of finding a buyer able to take advantage of your assumable loan.To really benefit from an assumable loan, a buyer would need to be flush with cash – enough to pay the difference between your mortgage and the current asking price for your home which will likely have appreciated since you bought it.Cash strapped buyers could take out a second mortgage to buy your home, but those costs would really cut into their potential savings, making your assumable loan less useful on the whole.Truly qualified buyers will therefore be few and far between, and those you find tend to be in very strong negotiating positions and might ask for a bigger chunk of the savings from the loan.
While FHA loans do offer an assumable option, they also tend to come with more expensive mortgage insurance premiums, both at closing and through a yearly rate.Sticking with the earlier example of a $200k house, the insurance premiums on an FHA loan would cost $7,525 over the course of the loan, which, though large, would make the assumable option still very valuable.When looking to the future, FHA loans taken out at today’s historically low interest rates are likely to have special value if a homeowner is able to take advantage of it.
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