Bestselling author and co-host of "The Ramsey Show," George Kamel went from negative net worth to a millionaire status within a decade by following Ramsey's proven money plan. Kamel is committed to breaking down complex money topics and busting money myths to help people save more while avoiding financial pitfalls. In a recent YouTube video, Kamel raised his concern about the growing buzz in the real estate industry about securing very low mortgage rates, as low as 3%, while US mortgage rates hover near record highs. It may sound impossible, but "Assumption Loans" or assumable mortgages can make it happen.
Kamel explained that assumable mortgages are not scams. When you buy a house, you take over or "assume" the seller's old mortgage rather than going to the bank for a traditional mortgage. The biggest lure of assumable mortgages is the low interest rates. In general, when mortgage rates are high, homeownership becomes expensive. Rates were at their lowest a few years back. Hence, if you decide to assume or take over a low-interest mortgage from a seller, which originated a few years ago, the move could translate to significant savings on interest payments over the long term.
Are Assumption Loans A Good Idea?
Kamel says no, primarily due to three reasons. First, you need tons of cash to assume a mortgage. Although you must have good savings for a house downpayment, the money you pay upfront for assuming a mortgage is much higher. Kamel highlighted that you need enough cash to cover the seller's equity to close the deal. For instance, Family A bought a house in July 2021 at a median home price of $379,000 with a 30-year FHA loan bearing a 2.78% interest rate. We can further estimate that if they made the 3.5% minimum downpayment, the monthly mortgage payments come to around $1,500. Given how the market played out, three years of appreciation through July 2024 could mean the house is now worth $445,000, a value gain of $66,000.
If Family B wanted to buy Family A's house by assuming their mortgage, they would require enough cash to cover the 3.5% down payment, all payments made towards the mortgage principle, and the property appreciation difference of $66,000. Overall, Family B would end up paying $103,700 to take over Family A's mortgage. The estimated closing amount of over $100,000 is the best-case scenario since the seller's property appreciated only for three years, and they took advantage of the lowest rates possible. However, assumable mortgages can cost over $200,000 in cash if factors like appreciation and rates don't align with your best interests. You might wonder about getting a second mortgage to cover that amount. Kamel highlighted that getting a second mortgage to cover the difference on an assumption loan is almost impossible as lenders "won't even go near these loans."
Secondly, Kamel thinks assumption loans limit your options as the whole process doesn't work like traditional loans. You can only assume government-backed loans from the Federal Housing Administration (FHA), the US Department of Agriculture (USDA), and the Department of Veterans Affairs (VA). Since only 22% of mortgages are assumable government-backed debt, choosing to opt for this loan structure would mean discarding 78% of the real estate market before even looking for a house. Furthermore, assuming an FHA mortgage comes with costly premiums for at least ten years, regardless of your downpayment size.
Lastly, the assumable mortgage closing process can take very long, from two to six months, as mortgage companies would rather have you open a new higher-interest mortgage. There's no real incentive for them to process the transfer of assumable mortgages. Furthermore, the tons of paperwork also adds to the prolonged closing time. You will also need the seller's consent before closing an assumable mortgage, and there are likely to be very few homebuyers willing to wait that long to sell their homes. Only 6,400 assumption loans were processed by the VA and FHA in 2023, accounting for 0.1% of all new mortgages originated last year.
Plenty Ways To Buy A House Without Breaking Your Budget
Kamel says to increase your downpayment for lower monthly mortgage payments and less debt. If you can't afford a house in the preferred location, it might help to expand your search by a few miles. "Adding 20 minutes to your commute could be the difference between getting a house or not," said Kamel.
He urged his viewers to be patient because there's no hard and fast rule about buying a home by 30 or any other age. The personal finance expert suggested potential homebuyers take their time, buy a home when it's right for them, and be prepared to adjust expectations if required.
