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For many Americans, housing is the most significant expense. People eager to ease living costs, build equity, and generate rental income are increasingly turning to a strategy known as house hacking.
House hacking is an excellent entry point for new investors into the real estate market. It allows you to fine-tune your approach while living more affordably than you might otherwise. Over time, a single house hack can evolve into two or three, facilitating the expansion of your investment portfolio.
However, the current real estate market poses challenges for investors seeking deals due to low inventory and high interest rates, making cash flow harder to achieve. In response, investors, including house hackers, are exploring creative solutions like room rentals or short-term leases.
One such hidden gem in the real estate world is assumable mortgages. This unique financing option empowers house hackers to roll back interest rates to as low as 2%, providing them with greater purchasing power.
What Are Assumable Mortgages?
Assuming a mortgage means taking over an existing loan when you purchase a house instead of getting a new one. All government-backed loans, such as FHA and VA loans, are assumable, and millions of these mortgages are available. In 2020 and 2021, when most new mortgages originated were below 4%, about a third of those loans are now eligible for assumption.
How it Works
When you assume a mortgage, you take over the existing loan balance, monthly payments, and the existing interest rate from the seller. To do this, you need to buy out the seller's equity in the property. For example, if the property is valued at $300,000 with $60,000 in equity and a 2.5% interest rate, you would need to bring $60,000 to closing, leaving you with a $240,000 loan at 2.5% interest.
Assumable mortgages offer a strategic advantage, especially for house hackers. By blending rates between the assumed mortgage and a potential second mortgage, you can potentially secure a lower overall interest rate compared to taking out an entirely new mortgage.
Types of Assumable Mortgages
Not all mortgages are assumable. Government-backed loans like FHA, VA, and USDA are eligible for assumption, provided you meet the necessary criteria. Conventional loans, on the other hand, are usually not assumable, except under specific circumstances like a family purchase, successor in interest, or divorce.
Why House Hackers Should Consider Assumable Mortgages
Assumable mortgages can be a valuable asset for house hackers due to several reasons:
1. Mortgage Eligibility: House hackers have an advantage as they will be occupying the property as their primary residence, a requirement for getting approved for an assumable government loan.
2. Lower Interest Rates:With interest rates at historic highs, assuming a mortgage with rates as low as 3% can result in significant savings compared to purchasing a home at over 7.5%.
3. Cash Flow: Assumable mortgages, coupled with potentially higher down payments, can lead to increased cash flow. This financial benefit applies both in the present and the future as house hackers may live for free or generate extra income while renting out previously occupied spaces.
Challenges and Solutions
While assumable mortgages offer substantial advantages, finding one independently can be challenging. Lack of awareness about the assumption process and limited access to a database of assumable mortgages are common obstacles. To overcome these challenges, house hackers can leverage resources like Roam, which oversees the entire assumption process for a 1% fee, ensuring a smooth and efficient transaction.
Conclusion
Assumable mortgages are a powerful yet underutilized tool for those looking to maximize their real estate investments, especially for house hackers. As you navigate the real estate landscape, the potential benefits of assumable mortgages may influence your decisions, prompting you to weigh factors like interest rates against the perfect location.
In the end, the choice is yours. Consider whether the potential benefits outweigh the effort, and use assumable mortgages as another valuable tool in your house-hacking toolkit.