Take Terry Day, a Phoenix-area real estate agent, who used an assumable mortgage to get a lower interest rate on his home.
In October, he and his wife purchased a 2,232-square-foot home in Goodyear, Arizona, for $385,000 with an interest rate of 2.375 percent. During this month, conventional mortgage rates have exceeded 7%.
To understand how much of a difference low mortgage rates can make, look at Days’ monthly payment. That’s $1,962 per month – well below the average monthly mortgage payment in the United States $2,823 on a 30-year fixed mortgage or $3,724 on a 15-year fixed mortgage.
“We save about $1,000 a month on our payments,” Day told Business Insider. “It was just a very easy transaction to make.”
The challenges of assumable mortgages
Although Day’s home purchase was a success, he said taking out an assumable mortgage came with challenges.
For one thing, he had to pay off the seller’s mortgage balance and closing costs, totaling $30,000. However, as a real estate agent when the house was sold, he waived his $25,000 commission, reducing the overall expense to $5,000.
He also found the loan process confusing. A lot mortgage lenders are not very experienced or trained in processing assumable mortgages, he said, explaining that this led to hiccups in his own transaction.
“The lender was difficult to work with at times, mainly because they were asking for underwriting items they didn’t need,” he said. “I’m fortunate to be as experienced in real estate as I am and I started working on these strange requests early on. I also reached out to my contacts in the lending industry to better understand how respond correctly and move the process forward.”
Day found that the paperwork required for an assumable mortgage loan – which is typically handled by the seller’s existing lender – is similar to that of a traditional mortgage loan.
“They want to see your income, your bank statements, what you pay on credit cards, car payments and any other bills you have,” he said.
To be eligible for an assumable mortgage loan, a buyer must also: Live in the house as their primary residence, have a good credit score above 580, maintain a debt-to-income ratio less than 50% and possess the ability to finance the down payment either with cash or with the support of a second loan at current interest rates.
Having experienced the loan assumption process firsthand, Day now teaches each of his clients about assumable mortgages and the requirements to obtain one.
“I make them aware of the possibility of saving a huge amount of money on a monthly basis with an achievable purchase,” he said. “I call it the ‘mortgage cheat code’.”