I sat in a signing with a client this week and was reminded that VA loans are assumable by the next person buying the property, if they have VA eligibility. That means they can apply for and take over the loan that the owner has been paying on, at the same rate. My clients’ rate was 4.25%, fixed for 30 years.
In a few years, when rates go up to 6%, 7%, or even 10%, that assumable loan will make their house a LOT more affordable than others.
FHA Loans are also assumbe. From an FHA website: You can assume an existing FHA-insured loan, or, if you are the one
deciding to sell, allow a buyer to assume yours. Assuming a loan can be
very beneficial, since the process is streamlined and less expensive
compared to that for a new loan. Also, assuming a loan can often result
in a lower interest rate. The application process consists basically of a
credit check and no property appraisal is required. You must
demonstrate that you have enough income to support the mortgage loan. In
this way, qualifying to assume a loan is similar to the qualification
requirements for a new mortgage loan.
How much difference does it make? On the average $500,000 loan on Honolulu real estate, with a 4.25% fixed rate, the payment is $2459.70.
If the rate goes up to 6%, the payment is $2997.75, a difference of $538.05 a month! That means the house with the 4.25% rate costs effectivley about the same as one that is $100,000 less, at 6%.
Now what if the rates go back up to 7%, as they were in 2001? The payment goes up to $3326.51, a difference of $866.81 a month!
You can see where this is going. The assumability feature of VA and FHA loans will be a huge advanatage for those sellers in a few years when rates go up, and I don’t think anybody doubts they will go up eventually.