There’s a way to land a sub-4% mortgage rate for buyers locked out of the housing market. But they’ve been hard to get—until now

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With mortgage rates continuing to hover between 7% and 8%, it’s been challenging—near impossible—for many homebuyers to break into today’s housing market. High monthly prices coupled with the lock-in effect, in which homeowners are reluctant to let go of their sub-4% mortgage rates, have prolonged the frozen housing market. 

But there’s one little-known trick for landing a lower rate: assumable mortgages. Earlier this month, Roam, a company that specializes in helping buyers find homes with sub-4% mortgages they can take over, announced a new feature in which buyers can purchase a home with a 2% mortgage included and a down payment as low as 15%. 

Assumable mortgages allow a homebuyer to purchase a house by taking over the current seller’s mortgage loan. They’re available on all government-backed loans; FHA and VA loans are eligible by law, and represent about one-third of mortgages in the U.S. While trying to land one of these low-rate mortgages might seem like a no-brainer for first-time homebuyers, assumable mortgages have historically been tricky to get in terms of both availability and accessibility. 

“There were two reasons assumption volume hasn’t been at the same volume as a purchase loan,” Raunaq Singh, founder of Roam, tells Fortune. One is that “sellers often took six to nine months to close, [and two] buyers needed a hefty down payment of 35%.” 

When assuming a mortgage, the seller is completely released from the mortgage, making the new buyer completely liable. The buyer also has to cover the seller’s equity in the home, which means they have to pay for the difference between the purchase price and the outstanding balance on the seller’s mortgage at closing, according to Roam. 

“Generally, loan assumptions can be tough for first-time buyers to navigate because they’ll need either sufficient cash or secondary financing to pay out the homeowner’s equity,” Chris Birk, vice president of mortgage insight and director of education at Veterans United Home Loans, tells Fortune. 

But Roam’s new product feature supports buyers with the down payment by allowing them to browse listings and determine the blended rate (the old market rate and new rate) and monthly payments based on the amount that they actually can or want to put down on the home. For example, a buyer interested in purchasing a $400,000 home could use Roam Boost to put 20% down on a home with a rate of 4.3%, according to Roam. That would save them more than $500 per month, assuming today’s higher mortgage rates. Roam also guarantees a 45-day close, which is much faster compared with other mortgage assumptions that can take months to complete. 

Their “seller guarantee tells sellers that we’ll close the assumption in 45 days or we’ll pay for their mortgage until we do close,” Singh says.

How common are assumable mortgages?

While Roam’s announcement this month sparked more conversation about assumable mortgages, they’re still relatively uncommon in the lending world. That’s because the majority of loans in the U.S. don’t qualify to become an assumable mortgage, being privately backed, versus those administered by the government. 

“For many people, this is not even an option to consider, but there is definitely a lot of curiosity and misinformation surrounding their availability,” Sarah Alvarez, vice president of mortgage banking at William Raveis Mortgage, tells Fortune. “This conversation always seems to surface when we are in an increasing rate environment.” 

Indeed, during the past few years, mortgage rates surged from as low as 3% to as high as 8% last fall. Plus, homebuyers looking into assumable mortgages need to remember that they have to get approved for the loan, just as they would for a new one. 

However, interest in assumable mortgages only continues to increase in today’s housing market.

“FHA and VA loan assumptions more than doubled in 2023 from the year prior. Interest in VA mortgage assumptions has surged over the last two years,” Birk says. However, “buyers will have to account for the homeowner’s equity. Would-be buyers assuming a loan often pay out the homeowner’s equity in cash. That might mean bringing tens or even hundreds of thousands of dollars to the closing table.”

What do assumable mortgages mean for lenders and for banks?

Although loan assumptions essentially just take over an existing mortgage, it could seem like a bad deal for lenders. 

“There is a fear that [assumable mortgages] could be harmful because lenders want their mortgages to be a reflection of the current rate environment to make sense for them,” Alvarez says. “At the end of the day, [mortgage lending] is a business, and banks don’t want to always be lending at significantly below market rates.”

And while there’s not much light at the end of the tunnel in terms of mortgage rates potentially dropping, they’ll eventually fall some.

“When rates come down, no one would choose to assume a mortgage with a higher rate,” Alvarez says.

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