Absolutely not! Economists and financial experts agree that interest rates will go up; it is just a matter of when. However, there may be a way to take advantage of today's low rates in the future that agents as well as the public seem to have forgotten.
FHA and VA loans are still assumable at their existing rates with buyer qualification. Prior to the late 1980's, FHA and VA allowed buyers to assume the mortgages without qualifying which provided buyers with bad credit or insufficient income a way to obtain a home with financing.
The reason buyers haven't assumed mortgages in the last 20 years isn't because it wasn't possible. It is because the rates have been steadily coming down and there was no advantage. If you had to qualify, you might as well get a new loan with a lower interest rate.
With the huge number of FHA and VA loans currently being originated and rates irrefutably going up, assumptions will once again be an attractive means for acquiring a home to obtain lower payments. Another benefit of the assumption is that the loan will be more advanced on the amortization schedule and it will build equity faster.
In the example in Table One, a couple buys a home for $175,000 with a 5% FHA mortgage that has principal and interest payments of $926.96. Assume it appreciates at an average of 3% per year; it will be worth $215,837 in seven years. Their equity will be $63,978 and the loan is assumable with buyer qualification.
In Scenario #1, a new buyer purchases the home with 10% down payment and secures a loan at the then market rate which is estimated to be 8%. The principal and interest payment will be $1,425.36. At the end of seven years, the new buyer will have an equity of $86,563.
An alternative method of purchasing is shown in Scenario #2 where the buyer pays the same price and puts the same 10% down payment but assumes the existing FHA mortgage at 5% interest. The buyer will need a second mortgage to make up the difference in the equity which is estimated to have a 9% interest rate.
The assumption with second mortgage will give the new buyer a combined monthly payment of $1,268.07 which is a monthly savings of $157.29. The savings alone would be reason enough to use an assumption but an additional benefit is that the property will have a larger equity at the end of the same time.
The equity with the assumption at the end of the seven years will be $103,215 compared to the $86,563 on the new 90% mortgage at the higher rate. That is $16,651 more with the assumption or 19% increase in equity.
To take the example one step further, if the monthly savings of $157.29 on the assumption was used to reduce the principal on the first mortgage, it would increase the equity in Scenario #2 to $118,995 or a 37% increase over the equity in Scenario #1.
Finding the "Right" home for a buyer is important but equally important is finding the "Right" financing. Not all agents have the training or the tools to identify the possible opportunities for buyers but the ones who do are invaluable.
