Global Courant 2023-04-30 17:30:01
With mortgage rates nearly double what they were in 2021, home buyers are doubly hit.
Higher interest rates have increased home financing costs. At the same time, homeowners are hesitant to move and part with their low mortgage rates, contributing to the housing stock shortages keep house prices high.
One possible solution is transferable mortgages, where the buyer takes over the seller’s existing loan and retains its interest and repayment terms. About 85% of homes have loans with a mortgage interest rate of less than 5% Redfin. This represents a potential for significant savings for buyers and could make it easier for owners to sell their homes, but transferable mortgages also come with some drawbacks. Let’s take a look at how they work and when this home financing strategy might make sense for you.
How do transferable mortgages work?
With a transferable mortgage, the buyer takes over the mortgage from the seller and keeps his interest rate payment schedule and loan balance. When rates rise, taking on an older mortgage loan can be a good way to get a mortgage interest rate well below the level you could qualify for if you were to apply for a new home loan.
To take out a loan, the buyer must meet the lender’s qualification standards. This process is essentially the same as applying for a standard mortgage: The lender reviews the buyer’s credit history, debt-to-income ratio (DTI), and other financial information. Since an appraisal of the home is not usually required, the application process is usually faster than usual and can be cheaper in terms of fees.
However, there are other factors to consider before building your own home dream around taking on a 3% interest rate mortgage. First, most mortgages are not plausible. Typically, only government-backed loans are acceptable and most mortgage loans are conventional. Over the past three years, government-backed loans accounted for only about 18% to 26% of home loan applications, according to the The weekly application survey of the Mortgage Bankers Association.
To take out a mortgage, the seller must have one of the following types of mortgages:
Pros and cons of taking out a mortgage
Assuming an existing mortgage means you have to weigh the benefits against the tradeoffs. On the one hand, taking out a mortgage can be a cost-effective way to finance a home purchase. But it can also be your deposit.
Advantages
Potentially lower mortgage rates May have lower costs Easier to find a buyer (when you are ready to sell)
For a buyer, the benefits of a transferable mortgage are obvious, especially as rates rise. And if the loan has a lower initial cost, it’s an even better deal for the buyer.
Sellers with an acceptable loan with a favorable interest rate can attract a larger pool of potential bidders. It’s like having an extra bedroom, says Ted Tozer, a nonresident fellow at the Urban Institute’s Housing Finance Policy Center. “It’s something that sets you apart from the market.” And to secure that cheaper mortgage loan, buyers are allowed to make higher bids on the property.
cons
May require a second mortgage with out-of-pocket payments May require a larger down payment
Aside from the fact that most mortgages aren’t plausible, there’s another major reason why mortgages aren’t more popular: the down payment.
Government-backed loans usually have smaller down payment requirements. VA and USDA loans require no down payment and you can get an FHA loan for just 3.5% down payment. But you’ll need to make a much larger down payment — at least 15%, according to Tozer — when you take out one of these loans.
The reason is that a transferable loan rarely covers the full purchase price of the home. That means the buyer has to figure out the difference. Some of the price difference can be covered by a second mortgage, but second mortgages are riskier for lenders (because if you default, the first mortgage will be paid before the second). A second mortgage therefore usually only covers up to 85% of the value of the house. That means the buyer has to pay the rest out of his own pocket.
An easy way to think about it is that when you combine the assumed loan, second mortgage, and down payment, they should equal the purchase price of the home. For example, if you took a $200,000 mortgage on a house that sold for $350,000 and then took out a second $97,500 mortgage, you would need to pay a $52,500 down payment (350,000 – 200,000 – 97,500 = 52,000) to close the deal. to close.
Another factor to watch out for is the cost of a second mortgage. These types of loans typically have higher interest rates than the first home loan associated with a home and have additional upfront closing costs. So you want to make sure that the closing costs, monthly payment and mortgage interest on a second loan outweigh the potential savings of taking on an existing mortgage. It is also more difficult to qualify for a second mortgage because the lender takes more risk than with a first mortgage.
How to find the best deal no matter what mortgage you go with
It’s always important to look around for a mortgage and compare offers from multiple lenders. That’s true whether you take out a loan and look for a second mortgage or get a brand new home loan.
When it comes to home loans, there is a trade-off between mortgage rates and fees. You may be able to get a lower interest rate if you pay higher fees and vice versa. Pay close attention to both and consider what best suits your goals and budget. One way to potentially save on initial costs is to compare quotes from lenders that don’t charge an initial fee, such as PenFed Credit Association or Ally Bank (although other charges apply).
Ally Bank Mortgage
Annual Percentage (APR)
Request online for personalized rates; fixed and adjustable rate mortgages included
Loan types
Conventional loans, HomeReady loan and Jumbo loans
Conditions
Need credit
Minimum deposit
3% if you continue with a HomeReady loan
PenFed Credit Union Mortgage
Annual Percentage (APR)
Request online for personalized rates; fixed and adjustable rate mortgages included
Loan types
Conventional Loan, VA Loan, FHA Loan, Jumbo Loan and Variable Rate Mortgage (ARM)
Conditions
Need credit
Minimum deposit
3.5% if you move forward with an FHA loan
Keep in mind that not all lenders offer second mortgages. So if you’re looking for a second home loan to supplement a supposed mortgage, you may need to search more than you bargained for. But comparing a large number of lenders also has other advantages, because each lender offers different types of mortgage loans.
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It boils down
Government backed mortgage loans such as VA loans or FHA loans are usually acceptable. If interest rates rise, taking out an existing mortgage loan can allow buyers to get cheaper financing.
However, the buyer may need to take out a second mortgage on the property and make a larger down payment to close the deal. These additional initial costs may not be within your home-buying budget, especially if you are a first-time buyer relying on a loan with a low or no down payment.
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Note to editors: Opinions, analyses, ratings or recommendations contained in this article are those of the Select editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.
