How a special type of mortgage is landing homebuyers low rates

Like a cat in a tree before the fire truck arrives, average 30-year mortgage rates are staying stubbornly high, sitting between 6%–7%.

But a growing number of homebuyers are turning to “assumable mortgages,” which can unlock rates closer to 2%–3%.

What are assumable mortgages?

As the name suggests, assumable mortgages allow buyers to take over an existing mortgage, often locking in a lower rate depending on when the original loan was taken out. Everything about the mortgage stays the same – except the name on the documents (a financial Freaky Friday of sorts).

Mortgage assumptions were a popular way to buy a house in the 1970s and 1980s, until the Garn St.-Germain Act of 1982 rendered them near obsolete outside of divorce and property inheritance.

But like vinyl records, what’s gone out of style is once again becoming en vogue. Google search results for the term “assumable mortgage” spiked in May, following a steady upward trend starting in 2022.

But… There are downsides to this type of arrangement. One being the need to pay the seller their equity in the house at point of assumption, which requires a large “down payment” or taking out a second mortgage.

Another downside is that only certain types of mortgages, typically government-backed (ex: FHA or VA loans), are eligible for assumption. Generally speaking, 20%–25% of the homes on the market are fully assumable, CNBC reports.

By the numbers: 4,052 FHA-backed mortgage assumptions were completed in 2023, a 59% jump from 2021. The VA puts those rookie numbers to shame, with a 713% jump in mortgage assumptions in 2023 compared to 2021.

• Both the VA and FHA are already outpacing last year’s assumption totals, at 5,000+ assumptions apiece so far in 2024.

📸 Big picture: The number of mortgage assumptions happening is far fewer than the number of mortgages that can be assumed – a gap that could keep closing as prospective homebuyers pursue alternate options to secure lower rates. Despite a recent Fed rate cut, mortgage interest rates rose last week for the third straight week, hitting the highest level since August.