Bestselling author and co-host of the “Ramsey Show,” George Kamel, went from negative net worth to millionaire in a decade by following Ramsey’s proven money plan. Kamel is on a mission to break down complex money topics and debunk money myths to help people save more while avoiding financial pitfalls. In a recent YouTube videoKamel expressed concern about the growing enthusiasm in the real estate industry to achieve very low mortgage rates of as low as 3% while U.S. mortgage rates are hovering near record highs. It may sound impossible, but “assumption loans” or assumable mortgages can make it possible.
Kamel explained that assumable mortgages are not a scam. When you buy a home, you assume the seller's old mortgage instead of going to the bank and taking out a traditional mortgage. The biggest appeal of assumable mortgages is the low interest rates. Generally speaking, when mortgage rates are high, homeownership becomes expensive. A few years ago, interest rates were at their lowest, so if you decide to assume a low-interest rate mortgage from a seller that was taken out a few years ago, this move could result in significant savings on interest payments in the long run.
Are takeover loans a good idea?
Kamel says no, mainly for three reasons. First, you need a lot of cash to assume a mortgage. Although you need to have saved well for the down payment on a home, the amount you pay up front to assume a mortgage is much higher. Kamel emphasized that you need enough cash to cover the seller's equity and close the deal. For example, Family A purchased a home in July 2021 at a median home price of $379,000 with a 30-year FHA loan with an interest rate of 2.78%. We can further estimate that with a minimum down payment of 3.5%, monthly mortgage payments are about $1,500. Given the way the market is going, a three-year appreciation to July 2024 could mean that the home is now worth $445,000, an increase in value of $66,000.
If Family B wanted to buy Family A's home and assume their mortgage, they would need enough cash to cover the 3.5% down payment, all payments on the mortgage principal, and the $66,000 appreciation difference. In total, Family B would need to pay $103,700 to assume Family A's mortgage. The estimated closing amount of over $100,000 is the best-case scenario because the seller's property only appreciated in value for three years and he took advantage of the lowest interest rates possible. However, assumable mortgages can cost over $200,000 in cash if factors like appreciation and interest rates are not in your best interest. You might think about taking out a second mortgage to cover that amount. Kamel emphasized that it's nearly impossible to take out a second mortgage to cover the difference on an assumption loan because lenders “don't even come close to those loans.”
Second, Kamel believes that assumption loans limit your options because the entire process doesn't work like traditional loans. You can only assume government-backed loans from the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA), and Department of Veterans Affairs (VA). Since only 22% of mortgages are government-backed debt, opting for this loan structure would mean shutting out 78% of the real estate market before you even start looking for a home. In addition, assuming an FHA mortgage comes with costly premiums for at least ten years, regardless of the size of your down payment.
Finally, the closing process of an assumable mortgage can take a very long time, from two to six months, because mortgage lenders would rather take out a new mortgage with a higher interest rate. There is no real incentive for them to process assumable mortgage transfers. In addition, the piles of paperwork also lengthen the closing time. You also need the seller's approval before you close on an assumable mortgage, and there may be very few homebuyers willing to wait that long to sell their home. In 2023, the VA and FHA will process only 6,400 assumption loans, which is 0.1% of all new mortgages originated last year.
Many ways to buy a home without breaking your budget
Kamel recommends increasing your down payment to lower your monthly mortgage payments and reduce debt. If you can't afford a home in the location you want, expanding your search a few miles can help. “20 minutes more commute time can make the difference between getting a home or not,” Kamel says.
He urged his viewers to be patient, as there is no hard and fast rule about whether one should buy a home in their 30s or at any other age. The financial expert recommended that prospective homebuyers take their time, buy a home when it's right for them, and be willing to adjust expectations if necessary.
