The 411 On Assumed Interest Rate: What It Is, Why It Can Work, & What Questions To Ask

In the world of real estate, it seems like there’s always the talk of something new circulating the internet and media depending on what’s going on in the market. 

Lately, the hot topic that’s been gaining traction is Assumed Interest Rate. 

If you’re like most of the world, your eyes might glaze over when you hear that term and you’ll probably ask the common question… “what exactly does that mean?”

As your friend in real estate, it’s my job to make the confusing things make sense and make sure you have full clarity around all of the tools available to you when buying or selling.

That’s why I make sure to pack the blog full of information and resources that you can refer to whenever you need!

For this blog post specifically, you’ll learn the 411 on Assumed Interest Rate, including what it is, why it can work, and what questions to ask in a situation where this topic comes up. 

Like anything in real estate, there are pros and cons to using this tool, so my hope is that you receive full clarity around this sometimes beneficial strategy and can ultimately make the decisions that are best for YOU!

What Is Assumed Interest Rate?

Put simply, an Assumed Interest Rate refers to a scenario in which a buyer takes over the seller's existing mortgage, assuming the interest rate associated with it.

Essentially, the buyer steps into the seller's shoes regarding the mortgage terms, including the interest rate, remaining loan balance, and repayment schedule.

This arrangement can be an alternative to obtaining a new mortgage with potentially different terms and rates.

Why An Assumed Interest Rate Can Work

There may be times where the seller's current interest rate can offer several advantages for both parties involved in a real estate transaction.

For the buyer, it can mean accessing a more favorable interest rate than what's currently available in the market, potentially resulting in lower monthly payments and overall savings over the life of the loan.

Additionally, it can streamline the buying process by bypassing the need for a new mortgage application, underwriting, and associated closing costs.

For the seller, it can mean a few things, including a faster sale, a competitive advantage, and lower closing costs. 

By offering an assumable mortgage, sellers can attract a wider pool of buyers who may be looking for a way to lock in a more favorable interest rate rather than securing a new mortgage. 

This can lead to quicker sale transactions, reducing the time the property spends on the market.

Additionally, in a competitive real estate market, sellers can differentiate their property from others by advertising the availability of an assumable mortgage, making their listing more appealing to buyers who are seeking ways to save money and may give the seller an edge in negotiations.

Lastly, sellers can potentially save on closing costs by transferring their existing mortgage to the buyer, since assuming a mortgage typically involves fewer fees and paperwork compared to obtaining a new mortgage, resulting in reduced transaction expenses for both parties.

At the end of the day, it really comes down to what position the seller is in and how quickly they want to get their home off the market! 

The Assumed Interest Rate strategy won’t always work, but it CAN be a huge benefit to both parties when everything is aligned just right.

Is Assumed Interest Rate New?

Here’s what’s super interesting about the topic of Assumed Interest Rate… it’s always been a thing. 

Similar to the rate buydown conversations we were seeing a lotttt of in 2023, this strategy is something that’s always been available we just haven’t always NEEDED it.

So, you might be wondering, “why are we just NOW hearing about this?”

Well, the increasing prevalence of Assumed Interest Rate transactions can be attributed to several factors with a major one being the rising interest rate environment that we’ve been seeing for several months.

Buyers are keen to lock in lower rates, making assumed mortgages an attractive option. 

Additionally, the competitive real estate market has prompted creative solutions to facilitate smoother and faster transactions, with assumed mortgages being one way to do it.

The Pros and Cons of Assumed Interest Rate

Like any financial strategy in real estate, assuming an interest rate comes with its own set of pros and cons. So that you can make the best decisions for yourself, here’s a list to consider:

Pros:

• Potential access to lower interest rates

• Reduced closing costs and streamlined process

• Faster transaction closing

• May be beneficial in a rising interest rate environment

Cons:

• Limited availability, as not all mortgages are assumable

• The seller's mortgage terms may not align with the buyer's preferences or financial situation

• Potential for assuming a higher interest rate than what's currently available in the market

• Additional due diligence required to ensure the mortgage terms are favorable

• The Buyer is responsible to pay the Seller the equity balance, that can look different depending on the buyer. They can either have a larger down payment or take out a separate mortgage at the current rate. 

With those in mind, it’s important to understand the IDEAL situation for an Assumed Interest Rate to really work. 

In my professional opinion, assuming an interest rate can be most advantageous when:

✔️interest rates are higher in the market compared to the seller's existing mortgage rate

✔️buyers are seeking to minimize upfront costs and expedite the buying process.

✔️the seller's mortgage terms are favorable and align with the buyer's financial goals.

✔️the buyer has a significant down payment to pay the seller's equity. 

Before proceeding with an Assumed Interest Rate transaction, it's crucial that you ask the right questions – regardless of whether you’re the buyer or the seller, you want to fully understand what you’re getting into!

Questions for Buyers:

• Is the seller's mortgage assumable, and if so, what are the terms and conditions?

• What is the remaining balance on the mortgage?

• What is the current value of the property? 

• Do you have enough down payment funds or do you need to look into other options? 

• How does the assumed interest rate compare to current market rates?

• Are there any potential risks or limitations associated with assuming the mortgage?

Questions for Sellers:

• Is my mortgage assumable, and if so, what steps are involved in transferring it to the buyer?

• Are there any penalties or fees associated with transferring the mortgage?

• How does the buyer's financial situation and creditworthiness impact their ability to assume the mortgage?

• What are the implications for me as the seller if the buyer defaults on the assumed mortgage?

Ultimately, the decision to proceed with an Assumed Interest Rate transaction requires careful consideration from the real estate agent, mortgage lender, and in some instances, attorneys.

Ready to Start the Home Buying or Selling Process?

Overall, Assumed Interest Rate transactions represent a unique opportunity for both buyers and sellers in the market.

By understanding this option, you can effectively weigh the pros and cons, ask the right questions, and make informed decisions that make the most sense for YOU!

Buying or selling a home is a very unique process and no transaction is the same. 

That’s what keeps my job fun. 🤪

My goal is for you to know all of the tools available to you so that we can have the right conversations and you can reach the outcome that you ultimately desire. 

If you’re ready to start the home buying or selling process, I’d love to meet you! 👋

If you’re local to Billings, CLICK HERE to get started and I’ll help you get started on the right foot.

And if you aren’t local to Billings, good news for you – I know people. 😏

Connect here and I’ll get you in touch with a trusted agent in your area to start the home buying or selling process with ease!