This Tip Can Get You a Really, Really Low Mortgage Rate

If you're mad at yourself for not buying a home when interest rates hit record lows in 2020 and 2021 -- or at any other time when they were lower than today's rates -- there might still be a way to go back in time.

This could be done with an assumable mortgage. This agreement involves taking over a seller's loan -- along with its terms -- for basically the price of their equity. Taking over a low-interest mortgage could lower your monthly payments, but it might require more down payment upfront and some flexibility on the homes you buy. Let's take a look at this type of mortgage and see if it can help you afford a home in 2023.

What is an assumable mortgage?

An assumable mortgage lets a home buyer "assume" responsibility for a seller's current mortgage, including its loan term, monthly payment, and interest rate. For example, if a seller financed a home two years ago with a 30-year mortgage and a 3.75% mortgage rate, you would assume the low rate and continue paying the mortgage's term, now 28 years.

How do you qualify for an assumable mortgage?

To be sure, you can't just walk into someone's house and take their mortgage. Certain qualifications must be met. For one, the seller's lender will look at your credit history and debt-to-income ratio and may ask for employment information or proof of income. If approved, you'll pay a small funding fee to initiate the loan, plus other expenses like a home inspection and title insurance.

Not all mortgages can be assumed. Most conventional mortgages are non-assumable, which leaves you with government-backed loans, such as:

• FHA loans
• VA loans
• USDA loans

Most importantly, you have to buy the homeowner's equity to assume their mortgage. This differs from a traditional home loan, which gives you some flexibility over how much money you put down upfront.

Consider the following example. A homeowner has a 30-year mortgage with a 3.75% rate on a balance that started at $200,000 in 2020. Over three years, they've paid roughly $10,000 toward their principal, reducing the balance to $190,000.

In the same span, their home's market value grew by $75,000. They now have $85,000 in equity, which represents the down payment you'll need to pay to assume their mortgage.

You can pay this $85,000 in cash, or you can take out a second mortgage to cover the difference. Paying cash is preferable, however, as taking out a second mortgage to cover the down payment might mean paying interest at today's rates, which kind of defeats the purpose of assuming someone's mortgage to snag a lower rate.

How do you find homes with assumable mortgages?

Homes financed with conventional mortgages are usually non-assumable, meaning you'll likely have to find homeowners who took out an FHA, VA, or USDA mortgage to initiate the agreement. And while in the past you would have had to jump through hoops to find this information -- possibly going through country records or hoping a real estate agent could find it in a local MLS -- many listing agents today are using assumable mortgages as a selling point in listing descriptions.

For example, you can use the real estate site Trovit to find listings with "assumable mortgages" in their descriptions. Just type in "assumable mortgage," plus the location where you're looking to buy, and the site will pull up classified listings using those keywords. You can also get notified when new listings pop up advertising "assumable mortgage" in the area you're looking to buy.

It's important to note that even if you find a home with an assumable mortgage, it's ultimately the mortgage lender's decision to allow a mortgage assumption. If you're interested in this approach, be sure your personal finances are in good shape. A high credit score, low debt-to-income ratio, and enough savings to pay the homeowner's equity is a good sign you're in a position to assume a mortgage.