Author: Madolyn Greve, Global Real Estate Sales, Broker Associate, Callaway Henderson Sotheby's International Realty

You may not have heard of anyone assuming an existing mortgage for over thirty years and didn’t know they were even possible any longer. The reason is simple, it didn’t make financial sense but now that interest rates are increasing, it may be an opportunity for some homebuyers.

Conventional loans added clauses to mortgages back in the early 80’s that gave the noteholder the right to raise the interest rate if a loan was assumed, as well as require the new buyer to qualify for the loan. This essentially ended the practice of assuming conventional mortgages.

Then, in the late 80’s, FHA and VA mortgages did impose the right to qualify the new buyers, but the big difference was that the mortgage rate would remain the same as the original borrower. Even so, it still effectively ended the assumptions of FHA and VA mortgages because rates on mortgages trended down for the next thirty years.

There was really no benefit to assume a mortgage that still required qualifying because it was possible to obtain a new mortgage with a lower rate. Generations of buyers have never even contemplated assuming a mortgage but now, in 2022, it might well be an alternative that will lower the cost of buying a home.

Mortgage rates hit a bottom in early 2021 and have been increasing since, this year especially.

Since qualifying is required for assuming an FHA or VA mortgage and only owner-occupants are eligible, you might be asking what are the benefits? If the interest rate on the existing mortgage is less than the rate on a new mortgage, there could be a savings.

In addition to that, there are fewer closing costs involved on assumptions of FHA and VA mortgages than originating new mortgages. Another benefit is that assuming an existing mortgage will be further into the amortization schedule than a new one which means equity-buildup occurs faster. And finally, lower interest rate loans amortize faster than higher rate loans.

The rub in this situation is that many buyers don’t have enough money to purchase an equity but there is a remedy for that. Let’s assume the buyer was considering a 90% conventional loan. If they identified a home with an assumable mortgage, they could put the same 10% down payment in cash, subtract the existing mortgage balance from what would be the 90% new mortgage and secure a second mortgage for the difference.

There are lenders that make this type of loan and buyers need to shop and compare rates and fees on them just like they would if they were getting a new first mortgage. Your agent can suggest lenders for second mortgages.

Most search filters on portal websites do not include assumable mortgages. You will need to rely on your agent to ferret them out. If the agent you are working with hasn’t suggested assumptions, it may be that they are unaware of their existence.

Have you ever been shopping on a website where you were looking at something that was on sale? You were interested in it but there wasn’t a sense of urgency and maybe, you had a lot going on and didn’t get back to it for a few days. When you did go back to the website, the price on the item had returned to its regular price.

How did you feel? Did you go ahead and purchase it for the current price? How did that make you feel knowing that if you had acted more decisively, you would have saved money and had the product by now?

In 2021, homes across the United State went up 19.1% on average. There were some markets where the prices soared 30 to 40%. Fortunately, last year the mortgage rates did remain relatively stable but that isn’t the situation this year, in 2022.

At the end of 2021, economists from Fannie Mae and Freddie Mac, felt like prices would go up around 7% for 2022. The Mortgage Bankers Association and the Home Price Expectation Survey predicted more like 5% and Zelman Research and the National Association of REALTORS� forecast closer to 3%.

While the number of sales did decline at the end of February 2022 to 7.2% month-over-month and 2.4% year-over-year, that could be explained as a lack of houses for sale. In the same month, inventory was 1.7 months which is down from 2 months in February 2021. The median sales price had a year over year increase of 15.0% to $357,300.

The Fed had their first of what may be four or five interest rate hikes this year to try and get control of the inflation rate. We have already seen mortgage rates at the 4.5% price and that is for borrowers with the best credit. Those with less than sterling credit can expect to pay more.

It is anyone’s guess at where rates will end a year from now, but many experts think this decade of low rates is over and we’ll not likely to see them again.

There is a pent-up demand for houses to buy and an urgency to buy before the rates get higher. If a buyer waits a year to purchase a home but the price goes up by 5% and the interest rate goes up by 1%, it will have a dramatic effect on the payment.

If the appreciation is closer to 10% increase, the negative effect of waiting is exacerbated.

The equity in a person’s home contributes greatly to their overall net worth and wealth position. The effect is very apparent in contrast to renters compared to homeowners whose net worth is 1/40th of the homeowners $300,000 or $8,000 for the renters.

As people stair step their way into larger homes to not only meet their increasing demands but also to enjoy the amenities of a nicer home, the equity will continue to grow based on two dynamics: appreciation and equity-build up. The renters do not benefit from either of these.

To run your own comparison, using your own numbers and what you believe will happen in the marketplace, go to Cost of Waiting to Buy. If you haven’t developed a plan to purchase in today’s market whether it be your first home or a move-up, you need facts and a trusted team of professionals to work for you.

It starts with finding an agent who will be as committed to find your home as you are. We would love to help you or your friends. It is what we do.

Real estate has been described as the basis of all wealth. Without considering income or investment property, buying a home to live in is an incredibly powerful way to build wealth or financial net worth.

A home is an asset measured by the size of the equity. Equity is simply the difference between the value of the home and the amount owed. There are two powerful dynamics at work to increase the equity which include appreciation and amortization.

Appreciation occurs when the fair market of the home increases. The shortage of available inventory coupled with high demand has contributed to an 18% increase in value in the past year on average for homeowners in the U.S.

Most mortgage loans are amortized with monthly payments that include the interest that is owed for the previous month and an increasing amount that is paid toward the principal loan amount so that if all the payments are made, the loan would be repaid by the end of the term.

A 30-year mortgage at 3.5% interest on a $400,000 loan amount would have a principal and interest payment of $1,796.18 every month for 30 years. After the interest is applied from the first payment, $629.51 would reduce the loan amount, thereby, increasing the owners’ equity.

Each succeeding payment would have an increasingly larger amount applied to the principal and a decreasingly lower amount applied to interest.

Recently, CoreLogic reported that homeowners with mortgages have seen their equity increase 29.3% since the second quarter of 2020. Equity rich is defined as when combined loans secured by a property are no more than 50% of estimated market value. ATTOM reported that 42% of mortgaged homes in the U.S. are considered equity rich as of the fourth quarter of 2021.

Another advantage of this powerful asset is that borrowing money against the equity of your home is a non-taxable event. Regardless of whether it is a refinance or a home equity loan, the borrowed money is not income and not taxable.

A homeowner could stay in the home for years and as the home increases in value due to appreciation, they could borrow against their equity as many times as the value will justify. They could continue to pull money out of their home for decades and under the current tax law, they could die and will the home to their heirs who would receive a step up in basis and the taxes would never have to be recognized.

Lastly, let’s consider the home as an investment by looking at the rate of return. Obviously, it is a personal asset that the homeowner will be able to live in, enjoy, raise a family, and share with their friends. In calculating the rate of return, we consider a $375,000 home with a 3.00% 30-year FHA mortgage with a 3.5% down payment. Using an annual appreciation of 3% and normal amortization, the $13,125 down payment in this home turns into a $148,062 equity in seven years. The rate of return calculated is over 40% per year for the seven-year holding period.

Even if you discounted the ROI by half for all the unforeseen other expenses that may affect the real equity, it is still a 20% return on investment which could easily justify why purchasing a home should be your first investment.

It is challenging, particularly in some markets with low inventory, multiple offers, rising prices and increasing interest rates, but the advantages of owning a home are significant. Would-be homeowners need the facts about their market and how to get into a home. Start with downloading the Buyers Guide and make an appointment with a trusted real estate professional.

Two commonly known ways to lower your mortgage payments are to make a larger down payment especially if it eliminates private mortgage insurance and improve your credit score before applying for a mortgage.

Another way to lower your payment would be to buy down the interest rate for the life of the mortgage with discount points. A discount point is one percent of the mortgage borrowed. Lenders collect this fee up-front to increase the yield on the note in exchange for a lower interest rate.

A permanent buy down on a fixed-rate mortgage is available to borrowers who are willing to pay discount points at the time of closing.

Let’s look at two options on a $315,000 mortgage for 30 years at 4% interest with no points compared to a 3.75% interest rate with one-point. The principal and interest payment on the 4% loan would be $1,503.86 compared to $1,458.81 on the 3.75% loan.

The $45.04 savings is available because the buyer is willing to pay $3,150 in points. By dividing the monthly savings into the points paid, you can determine the breakeven point. In this example, if the buyer is planning to stay in this home for at least 70 months, they would recapture the cost of the points and each month after that would be savings.

Another interesting thing to consider is that lower interest rate loans amortize faster; in other words, they build equity faster by paying off the loan sooner. If the buyer stayed in the home for 10 years, their unpaid balance in this same example would be $2,117.38 lower than the 4% mortgage. Combine that with the $2,259.29 in savings from the breakeven point to the end of 10 years and the buyer, in this situation, is $4,372.67 better off buying down the mortgage by paying the additional points.

For a person buying a home, it may be difficult to come up with the extra amount for the points but one benefit is that the points paid are considered interest by IRS and can be deducted in the year paid.

A rule of thumb commonly used is that one discount point lowers the quoted mortgage rate by ¼% or 25 basis points. A lender may quote X% + .6 points for a mortgage. Using this scenario, to lower the mortgage rate by .25%, the buyer would need to pay 1.6 points. It is important to note that each lender determines the pricing of points for the loans they make.

It may be beneficial to a buyer to pay points depending on how long they plan on being in that home. To help you determine whether paying points should be considered, use this Will Points Make a Difference and download the Buyers Guide

We have all heard this expression that implies that had a person known earlier in life what they know now, they would have done things differently. The subject possibilities are endless While no one has a crystal ball to see into the future, it may be possible to learn from people who have experienced similar situations.

In the late sixties, mortgage rates hit 8.5% but before the decade had finished, the rates had come down to 7% where they stayed for some time. Homeowners who purchased at the higher rate, could buy a larger, more expensive home for the same payment if they could get out from under the obligation of their existing mortgage.

FHA and VA mortgages, up until the late 80’s, could be assumed by anyone, regardless of credit worthiness. Since these homes were purchased one or two years earlier, the sellers didn’t really have much equity in them, and many homeowners were willing to “give” them to investors so they could qualify on a new, lower rate mortgage.

It was a fantastic opportunity for investors who could afford the negative cash flow because the homes wouldn’t rent for the payment. As the 70’s economy, started heating up, so did inflation. Most people consider inflation an undesirable thing but for people who owned rental property, it meant the values were going up and so were the rents.

Soon, the rentals no longer had negative cash flows and the investments turned the corner. If you talk to investors who purchased those homes during that period, you’ll very likely hear, “I should have bought more of them.”

If we could fast forward into the future to see how people will be talking about the period we’re currently in, we might see an even greater opportunity in our present time. Interest and mortgage rates have been on a downward trend for thirty years. In the past ten years, they hit an historic low. They are trending up currently and it appears they will continue to do so.

Homes are in short supply which has caused the prices to go up. Builders haven’t returned to the number of new units needed to meet demand and that has been going on for over ten years. Even when the supply does increase, it will take a long time to catch up with demand.

Combine that with supply chain shortages due to the pandemic and prices look like they are unaffordable. Many millennials and some Gen Xers believe the “window of opportunity” has closed.

For tenants, rents are continuing to increase due to the same causes that home prices are increasing. Buyers, by acting now, can lock in their mortgage rate and the purchase price of the home. As prices continue to increase and the amortization of the mortgage pays down the unpaid balance, homeowners’ equity increases and so does their net worth.

Unfortunately, for tenants, the rents will continue to rise, along with prices which will make it more difficult in the future to purchase. Their rent is used to pay the landlord’s mortgage who benefits in the principal reduction for each payment made.

The market is changing and people who don’t own a home currently must find a way to buy one. The longer they wait, the harder it will be to buy one.

People wanting to purchase a home in today’s market must educate themselves with facts and not hearsay. There are all sorts of programs available to address low down payments, varieties of mortgages, credit issues and other things.

It starts by meeting with a real estate professional who can recommend a trusted mortgage professional. Download our Buyers Guide and check out your numbers using the Rent vs. Own.