Benefits of assumable home loans

By: J. David Chapman/November 3, 2022

I tell my students, and anyone who will listen, that I don’t fall in love with properties. I fall in love with the financing on properties. I am much less likely to sell a property with a great interest rate (and other terms) than one without. I am less likely to sell a property with a fixed, long-term loan than one with a short, variable-rate loan.

This may not seem important in our market; however, brokers and investors, pay attention. This will affect our industry in ways they did not anticipate. Sellers already were unlikely to sell property because they anticipated paying capital gains tax and were afraid of not finding good replacement properties. As brokers, we overcome that through a 1031 tax-deferment option, and many times this is a great option for a seller. In the past, we didn’t have to worry about the interest rates on the newly acquired property because we have seen much rate consistency in the past decade.

We are now entering into a whole-new objection. People are now not selling because the newly acquired property has a significantly higher interest rate than what they are selling. A solution may lie with the assumable mortgage. The last time we saw a significant number of assumptions was in the late 1970s and early 1980s, when interest rates were at the highest levels in the past 50 years. Back then, buyers could assume a seller’s mortgage at the original loan interest rate. This rate was usually significantly lower than the then-current rate of a new mortgage. Typically, rates in 1965 were less than 6%, and by 1980 the average mortgage rate was almost 15%. Therefore, the assumable quality of a mortgage makes the property more valuable.

Always remember that interest rates are still very good. Yes, it is all relative, and they were unreasonably low for a long period of time and now seem high. Buyers need to compare the costs of purchasing a home and renting a home. Home rentals are going up as well. It is an easy comparison, and it is likely that they will find owning a home to still be a good alternative, especially when considering the advantages of owning property during inflationary periods. Real estate is absolutely the best hedge against inflation.

J. David Chapman is professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).