Looking for an alternative to paying higher, current rates? This could benefit buyers with lower closing costs while saving money on the payment. Your alternative could be existing FHA and VA mortgages – they’re assumable at the note rate to owner-occupied buyers who qualify.
For the last 20 years, rates have been steadily coming down and there was no reason to qualify for the assumption when a new loan had a lower interest rate.
We’re going to start to make some assumptions. Assuming that a FHA or VA loan with a lower interest rate will obviously mean lower payments – it will also build equity faster because the amortization schedule is advanced from a new 30-year mortgage. And here’s another benefit – the acquisition costs on an assumption are significantly lower than starting a new loan.
In the example in Table One, a couple bought a home two years ago for $400,000 with a 3% FHA mortgage that has principal and interest payments of $1,656. It is now worth $435,000.
So let’s take a look at a hypothetical situation involving the sale of this home after two years.
In scenario #1, the buyer purchases it for $435,000 with 10% down payment at the then, current rate of 5% for 30 years. The principal and interest payment is $2,102. If the home appreciates at 4% annually the equity will be $230,989 in seven years.
In scenario #2, the buyer purchases it at the same price with the same down payment but assumes the 3% mortgage with 28 years remaining. Since he doesn’t have enough cash to buy the equity, he gets a second mortgage for the balance at 5%. The combination of the payments on the first and second are $1,739 or $363 less than the payments in scenario #1.
Facts are very important – and even more so in this case. The fact is, in seven years, the $363 savings accumulated to $30,492. The future equity is $21,457 larger on the assumption because the first mortgage is at a lower rate and the loan is amortizing faster. In this example, the buyer is much better off assuming the FHA mortgage.
There definitely is a challenge in real estate with the regards of identifying which homes for sale have assumable FHA or VA mortgages because for decades it didn’t make much difference to list it in the description. Many MLS’s are not even including fields for existing mortgages.
Finding the “Right” home for a buyer is important but equally important is finding the “Right” financing. Not all agents have the training or the tools to identify the possible opportunities for buyers but the ones who do are invaluable.
I can provide Insider Information on Fairfax VA homes for sale. Get you a FREE Market Snapshot Report of Your Northern Virginia Home’s Value, or Search All Northern Virginia Homes For Sale. Put that data you need at the tips of your fingers!