Interest rates for mortgages are really, really low at the moment. Will they go up sometime? Sure, of course. Should that affect your decision to buy now? You bet. For my younger generation of potential home buyers, let me take a short trip down memory lane, along with others who remember:
First, look over the graph below showing the history of mortgage rates. Let’s go back just a few years to the 70’s with a personal reflection:
I was mobile, like a lot of families – pretty much knew I would have to move to and from somewhere in the country every 3 or 4 years. Real estate was an important part of the game plan. Many of us bought homes; let’s say mine was for about $180,000 with a VA loan at a decent interest rate in 1976 – maxed out with very little down – leverage, right?
Then the early 80’s happened! Interest rates careened to ridiculous levels. Buyers cringed, as you can imagine, or can remember. But my home sold in a matter of weeks, and at my asking price with a nice profit! A lot of others did as well. The magic was my assumable loan. My interest rate and the relatively low monthly payments had more selling power than the home itself! True, the buyer had to come up with a big down payment to get to my asking price and to assume my loan. Sure glad I had taken the loan out for the maximum amount at the time I purchased because that helped.
Assumable loans were golden to buyers and sellers. Assumable loans – now there’s a term we haven’t heard about lately, so let’s think about it in light of today. Holding an assumable mortgage at today’s low interest rates may be an important hedge for homeowners against a surge in interest rates. It could make the difference in being able to sell your home in the future. (By the way, after my move I sat it out – rented for two years until sanity returned to the mortgage industry.) Lucky? No, I had some real good advice, and I listened.
So let’s pose some questions to Cindi Myers from USA Mortgage (http://cmyers.usa-mortgage.com). Cindi, what kind of loans are being made today, and are they assumable? All of them? Could it be important in the future?
“Well Bob, only government loans are assumable in this day and age. When I say government, I mean FHA and VA loans. FHA is your traditional first time home buyer loan, with a 3.5% down payment requirement, which is backed by the government. VA loans are for veterans and active military, who have served the minimum required time to qualify. VA loans offer 100% financing. A later assumption is handled directly by the lender. There is normally a $500 fee associated with this type of transaction. The homeowner would inquire directly with their lender and the lender would send out a loan package that the potential buyer would have to complete and return with the predetermined fee. In these days, they would have to credit qualify for the assumption, as well as to qualify for a debt to income ratio. The advantage is the new buyer is literally taking over the loan balance at the rate the original borrower took out. Of course, the owner’s equity is a whole other discussion. On a VA assumption, if the new potential owner is not a veteran, the original veteran’s entitlement stays with the property, which means the original veteran doesn’t have the full benefits restored to him. Obviously, dependent on the circumstances, that might be a problem. With all of the refinancing that has taken place recently, I would say there is a considerable about of government loans that could be assumed. With Freddie & Fannie tightening their belts and all of the additional overlays of risk that lenders have implemented, government loans have dominated.”
So, if history repeats itself, and it always does, we will see higher interest rates in the future. Having an assumable loan may be a great hedge against the future sale of your home. Can you see your listing when interest rates are above 10 %? “Take over the payments on my 5% loan!” Think about it.
