The Secret to Securing an Affordable Mortgage Rate on Your Next Home Purchase

Anthony Volpe realized he might be out of luck. It was the summer of 2024, and this former pharmacist and professor was searching for a house near Orlando. The pandemic had caused a surge in home prices but had also led to a significant decrease in mortgage rates. These rates were at an all-time low of 2.7% in early 2021, allowing buyers to purchase more expensive homes while maintaining affordable monthly payments. Unfortunately for Volpe, by the time he began his search, typical interest rates had more than doubled to about 6.5%, which significantly increased the mortgage costs for newcomers. Despite this, Volpe discovered a method to secure an exceptionally low rate.

Prior to his house hunt, Volpe had watched a TV segment about Roam, a company promising to help buyers obtain low rates from years past. Typically, when a house is sold, the seller clears their existing mortgage with the sales proceeds, and a new loan is arranged by the buyer. However, some homeowners have loans that can be transferred to the next buyer — the same interest rate and monthly payment — known as assumable mortgages. Such mortgages lost popularity as mortgage rates dropped, with new loans being cheaper. Nevertheless, their significance has been revived by recent rate hikes, with companies like Roam facilitating these transactions.

Exploring Assumable Mortgages

Thousands, if not millions, of these assumable mortgages exist across the country. Many owners are unaware of their potential. Transitioning these loans involves numerous challenges, and real estate agents are often unprepared to assist. Properly executed, assumable mortgages can be a mutual benefit for sellers and buyers. Sellers can attract more offers and higher prices due to their favorable rates, while purchasers gain decades of manageable payments, making the slightly higher purchase price negligible. Using assumables could rejuvenate the stifled housing market, where both sellers and buyers feel frozen by high rates.

Through Roam, Volpe discovered a home in Davenport, near Orlando, with three bedrooms. He put down 33% of the home's $268,000 cost in cash and assumed the seller’s advantageous 2.75% mortgage rate. He estimates a $500 monthly saving compared to current average mortgage costs.

"It offers us more financial flexibility," Volpe observed.

The Benefits of Low-Rate Mortgages During and After the Pandemic

The pandemic's first years triggered a rush among Americans to secure low mortgage rates by purchasing new homes or refinancing existing ones. Even as rates rose afterward, many retained the advantage: about 72% have mortgages below 5%, with 21% below 3%. While these borrowers enjoy low payments, their benefits created an unforeseen consequence — a stagnated housing market. Homeowners prefer not to lose their favorable rates, complicating life for upgraders and renters.

Raunaq Singh, Roam's CEO, sees a solution to this so-called lock-in effect: simply transfer existing low-rate mortgages to new buyers. Singh criticizes any overly complex solutions, stating, "Transfer the loan from seller to buyer without the drama."

FHA-backed loans popular with first-time buyers due to low down payments are naturally assumable. So are mortgages insured by the Department of Veterans Affairs and the Department of Agriculture. Data shows about 12.5 million mortgages in the U.S. can be transferred, constituting around 25% of outstanding loans, with millions at appealing rates of 4% or less.

Simplifying the Mortgage Assumption Process

The assumption process requires qualifying for the loan type. The seller must agree, and the loan servicer processes the transfer, only mandated to proceed if the buyer qualifies. Buyers must cover disparities in selling price versus mortgage balance, potentially using savings or a secondary high-rate mortgage. Still, combining loan rates may result in affordable payments.

Roam aids in locating and securing assumable loans, reminiscent of Zillow's approach but special for exceptionally low rates. Roam ensures servicer compliance, providing a seamless assumption process.

The Challenges and Opportunities of Assumable Mortgages

Engaging an assumable mortgage is beneficial for buyers and sellers. Sellers can leverage their favorable rates to attract more buyers even if they will face higher rates on subsequent purchases. Many sellers reluctantly stay put because the cost of a new mortgage isn't appealing. Assumable mortgages could encourage mobility, addressing the housing supply constraints.

A study suggested homes with assumable loans sell about $20,000 higher than similar properties, reflecting the market value of more accessible mortgage payments. Faster sales and diminished lock-in effects are the predicted benefits.

Overcoming Procedural Delays and Building Awareness

Obtaining assumable mortgages could be slowed by cumbersome administrative processes. Loan servicers tend to delay assumptions due to lesser earnings compared to new loans, frustrating buyers and sellers. The sluggishness extends deals multiple months.

Some propose new policies to allow loan servicers higher fees for assumptions, encouraging faster processing. However, entities like Roam help navigate the hurdles for a fee, expediting deals and ensuring comprehension by loan servicers.

Despite obstacles, there's potential for assumable mortgages to become mainstream, sustained by growing understanding within the market. Such loans waive lender's title insurance and other costs, providing notable savings even for those willing to face procedural challenges.

The lack of awareness poses the biggest obstacle, with assumable mortgages often overlooked in real estate listings. As Singh emphasizes reducing this oversight, the aim is to shift mindsets and enable more buyers the opportunity to capitalize on favorable mortgage conditions.

Business Insider's coverage offers clarity on assumable mortgages, revealing their practicality and potential to invigorate the real estate landscape.