From one of our preferred lenders Prospect Mortgage
An often overlooked benefit of Federal Housing Administration (FHA) loans is that they’re assumable, meaning the buyer can take over the seller’s home loan, and, more importantly, the loan terms.* This is particularly important given the current historically low interest rate environment and that rates may rise over the years to come.
An assumable loan provides the buyer with a seller’s advantage because lower interest rates dramatically affect affordability when it comes to purchasing a home.
To determine how valuable an assumable FHA loan could be, we can look at the following scenario: On a $200,000 mortgage, if interest rates increase from 4.5% to 5.5%, the cost of the mortgage payment increases $123 a month. If interest rates increase from 4.5% to 6.5%, the cost of the mortgage increases $251 a month.
In another scenario, assume the buyer purchases a home today with a $300,000 FHA loan at 4.5%. The principle and interest payment would be $1,520.06.** If the owner decides to sell the home three years later and rates have risen to 6.5%, the home would have to sell for $60,000 less for the next buyer to have the same principle and interest payment. But with an assumable loan, this property has a $60,000 advantage over others for sale without the FHA loan. Clearly, buyers using FHA financing will have a much easier home to sell in a rising rate environment.
When assuming an FHA loan, the buyer would need to make up the difference between the existing loan balance and the new purchase price with a down payment, or a combination of a down payment and secondary financing.
An assumable FHA loan could be very advantageous for the future buyer. And it’s also advantageous for the seller. If rates go up, a low-rate assumable loan might make the house more valuable upon resale.
If you have clients that are considering purchasing a home, you should talk with them about the benefits of an FHA loan.
* The buyer must qualify for an FHA loan in order to assume the loan.