The challenges of buying real estate today are many. Low inventory, high prices and expensive mortgage rates make the dream of homeownership more difficult. A combination of these factors does not make it any easier. In June 2024, the median sales price for existing homes in the U.S. rose 4.1% year-over-year to $426,900, according to the National Associations of Realtors. This marks the twelfth consecutive month of annual price increases. In parallel, unsold home inventory rose to a 4.1-month supply at the current monthly sales rate by the end of June. Experts believe that a balanced market should have four to six months of inventory, according to Forbes Advisor. Economically speaking, low supply usually leads to rising prices. Since inventory is low, the price increases are likely due to this. One reason for the low supply is that high mortgage rates keep potential sellers in their existing homes. When comparing a cheap 3-4% mortgage to today’s 7% interest rates, many lose the motivation to sell. However, an assumption mortgage may offer a solution to avoid being stuck with excessive interest rates. An assumption mortgage takes over the existing mortgage of a home being purchased. The terms of the original loan remain the same, meaning monthly payments remain the same. The main benefit of this type of mortgage is that you may pay a much lower interest rate than you would if you took out a new mortgage under current terms. As of August 1, the average interest rate for 30-year fixed-rate mortgages was 6.73%, according to the Federal Reserve Bank of St. Louis. Three years ago, it was about 2.77%, and in 2019, it was 3.75%. Lower interest rates could result in significantly lower monthly payments, so if an assumption mortgage is right for you, you could avoid the high current cost of borrowing. Plus, you’ll pay off the balance of an existing loan, which could allow for a shorter repayment period and therefore faster debt freedom. Still, there could be challenges. Even with an assumable mortgage, the purchase price is not automatically lower. Real estate values have increased significantly over the years. In the second quarter of 2019, the median sales price of a home in the U.S. was $322,500, rising to $412,300 in the second quarter of 2024. Therefore, a large down payment may be required to cover the difference between the home’s sales price and the remaining loan amount. If this gap cannot be closed, a second loan may be necessary, which could result in less favorable terms and higher risks. Not every type of mortgage is assumable either. Typically, this only applies to government-backed loans such as FHA, VA and USDA loans. However, each of these loan types has its own unique features and potential pitfalls. It is important to carefully weigh the pros and cons of an assumable mortgage before choosing one.
