q & a: What is an assumable loan?

 

 

: What does it mean when a loan is "assumable?"

 : A little-known, and little-understood benefit of the FHA and VA mortgage programs is that the loans are assumable. Depending on the conditions of the market, sometimes this is an amazing benefit, and other times it isn't much of a benefit at all. Let me explain.

"Assumable" means that someone else can assume, or take on your loan. So if you decide to sell your home in say, 5 years (or 3 or 17, for that matter), a seller can opt to assume your loan--so however much you still owe on the house, and whatever interest rate you had, the buyer can take that loan over, and pay you cash for the difference in sales price. It is important to note that VA loans are only assumable to eligible veterans, but FHA can essentially be assumed by anyone who qualifies. You would simply need to sign the loan over to them, so the debt was no longer attached to your name.

So what's the big deal? Who cares about assumability? Honestly, people today rarely assume loans--because interest rates are at record lows, and they will get a better deal by getting a new loan today. But if you are looking at buying a house today, while interest rates are low, and plan on selling a few years down the road, when interest rates might be higher, assumability could serve as a long-term benefit for your home's marketability.

Chew on this: If you buy a home today at a 4.25% interest rate, and decide to sell 10 years from now, when rates happen to be at 8%, your assumable-rate home is suddenly going to become a very hot commodity!

Back in the early 1980s, interest rates reached 18%! Homes for sale with assumable loans of even 12% sold for more, and were in higher demand than those without an assumable loan. Hopefully we won't see interest rates get that high again, but they are always changing, and assumability could help you get top dollar, and sell your home quickly when you need to.

 

Bottom line: 

Getting an assumable mortgage when rates are at historical lows (like today) could help you get top dollar for your home when you decide to sell.

 

If rates are at historical highs (like the 1980s), you probably wouldn't consider assumability as a benefit when choosing a loan program.