assumable loans in high interest environment

[AK]

Yeah I remember when I was a kid, real estate listings often touted VA/FHA assumable loans and so forth. I got the impression it was a big selling point, especially in the early ’80s when rates were in the high teens.

I did some quick calcs last night … on a 30-year fixed, if rates go up 100 basis points, monthly payments will go up about 10%. Combine that with the lower cost and relative ease of assuming the loan and you’d have a real selling point.

I see it as a short-term hedge against declining market conditions … if for some reason you had to sell in the first 5-6 years, I’d guess you could get out unscathed even in the face of a 10% decline.

[AK]

IIRC the only assumable conventional loans are (some) adjustable-rate mortgages, and I’d guess that different lenders and products would have different policies.

[AK]

IIRC the only assumable conventional loans are (some) adjustable-rate mortgages, and I’d guess that different lenders and products would have different policies.

[AK]

IIRC the only assumable conventional loans are (some) adjustable-rate mortgages, and I’d guess that different lenders and products would have different policies.

[AK]

IIRC the only assumable conventional loans are (some) adjustable-rate mortgages, and I’d guess that different lenders and products would have different policies.

[AK]

IIRC the only assumable conventional loans are (some) adjustable-rate mortgages, and I’d guess that different lenders and products would have different policies.

[scaredyclassic]

fha isn’t really the “new subprime” — it may actually be the smart way to make money on real estate in the next 10 years. maybe the only way, if prices are flat. and in a way it makes sense, since one isn’t really buying a home, one is buying a mortgage. the financial decision has less to do with the layout of the house than the features of the loan. what i get for my 20% down is a loan i cannot sell. I wouldn’t buy a house I cannot transfer — why would I buy a loan I could not transfer, unless I was greatly conpensated for that lack of flexibility?

fha is not the new subprime in this sense; when I think subprime, i think unqualified buyers — but fha is qualifying income…

also, subprime has a big interest rate penalty — no so with fha.

i know ive been through this analysis before on fha v. conventional, and run numbers extensively, but i was only analyzing the oppty costs of my down payemnt, and the penalties associated with the fha loan….i wasn’t thinking about the value of an assumable loan in a spiking interest rate environemnt. I’m not sure about anything, but i am willing to bet there is a large spike in us interest rates sometime in the next 15 years, and i know i’ll want or at leats be willing to sell this house sometime in the next 15 years….

am I overthinking this?

yeah.

Is there any value to my thinking about this?

to me, yes…

ok, so, if payments go up 10% for every 100 bps increase, then if interest rates hit 15% — and I bet they will at some point — a $2,000 house payment will be $4,000. Say the price is flat or even down, but the paymennt is way up. I will have an “asset” (the fha loan) which is worth twice as much as it was previously worth, even in the face of crappy appreciation. it’s not really an asset, obviously, since it’s debt, but it has a super desireable interest rate which is worth a lot.

what am I missing, people? Why in the heck would anyone in his right mind put down 20% unless he was going to pay the loan for sure the full 30 years?

[scaredyclassic]

fha isn’t really the “new subprime” — it may actually be the smart way to make money on real estate in the next 10 years. maybe the only way, if prices are flat. and in a way it makes sense, since one isn’t really buying a home, one is buying a mortgage. the financial decision has less to do with the layout of the house than the features of the loan. what i get for my 20% down is a loan i cannot sell. I wouldn’t buy a house I cannot transfer — why would I buy a loan I could not transfer, unless I was greatly conpensated for that lack of flexibility?

fha is not the new subprime in this sense; when I think subprime, i think unqualified buyers — but fha is qualifying income…

also, subprime has a big interest rate penalty — no so with fha.

i know ive been through this analysis before on fha v. conventional, and run numbers extensively, but i was only analyzing the oppty costs of my down payemnt, and the penalties associated with the fha loan….i wasn’t thinking about the value of an assumable loan in a spiking interest rate environemnt. I’m not sure about anything, but i am willing to bet there is a large spike in us interest rates sometime in the next 15 years, and i know i’ll want or at leats be willing to sell this house sometime in the next 15 years….

am I overthinking this?

yeah.

Is there any value to my thinking about this?

to me, yes…

ok, so, if payments go up 10% for every 100 bps increase, then if interest rates hit 15% — and I bet they will at some point — a $2,000 house payment will be $4,000. Say the price is flat or even down, but the paymennt is way up. I will have an “asset” (the fha loan) which is worth twice as much as it was previously worth, even in the face of crappy appreciation. it’s not really an asset, obviously, since it’s debt, but it has a super desireable interest rate which is worth a lot.

what am I missing, people? Why in the heck would anyone in his right mind put down 20% unless he was going to pay the loan for sure the full 30 years?

[scaredyclassic]

fha isn’t really the “new subprime” — it may actually be the smart way to make money on real estate in the next 10 years. maybe the only way, if prices are flat. and in a way it makes sense, since one isn’t really buying a home, one is buying a mortgage. the financial decision has less to do with the layout of the house than the features of the loan. what i get for my 20% down is a loan i cannot sell. I wouldn’t buy a house I cannot transfer — why would I buy a loan I could not transfer, unless I was greatly conpensated for that lack of flexibility?

fha is not the new subprime in this sense; when I think subprime, i think unqualified buyers — but fha is qualifying income…

also, subprime has a big interest rate penalty — no so with fha.

i know ive been through this analysis before on fha v. conventional, and run numbers extensively, but i was only analyzing the oppty costs of my down payemnt, and the penalties associated with the fha loan….i wasn’t thinking about the value of an assumable loan in a spiking interest rate environemnt. I’m not sure about anything, but i am willing to bet there is a large spike in us interest rates sometime in the next 15 years, and i know i’ll want or at leats be willing to sell this house sometime in the next 15 years….

am I overthinking this?

yeah.

Is there any value to my thinking about this?

to me, yes…

ok, so, if payments go up 10% for every 100 bps increase, then if interest rates hit 15% — and I bet they will at some point — a $2,000 house payment will be $4,000. Say the price is flat or even down, but the paymennt is way up. I will have an “asset” (the fha loan) which is worth twice as much as it was previously worth, even in the face of crappy appreciation. it’s not really an asset, obviously, since it’s debt, but it has a super desireable interest rate which is worth a lot.

what am I missing, people? Why in the heck would anyone in his right mind put down 20% unless he was going to pay the loan for sure the full 30 years?

[scaredyclassic]

fha isn’t really the “new subprime” — it may actually be the smart way to make money on real estate in the next 10 years. maybe the only way, if prices are flat. and in a way it makes sense, since one isn’t really buying a home, one is buying a mortgage. the financial decision has less to do with the layout of the house than the features of the loan. what i get for my 20% down is a loan i cannot sell. I wouldn’t buy a house I cannot transfer — why would I buy a loan I could not transfer, unless I was greatly conpensated for that lack of flexibility?

fha is not the new subprime in this sense; when I think subprime, i think unqualified buyers — but fha is qualifying income…

also, subprime has a big interest rate penalty — no so with fha.

i know ive been through this analysis before on fha v. conventional, and run numbers extensively, but i was only analyzing the oppty costs of my down payemnt, and the penalties associated with the fha loan….i wasn’t thinking about the value of an assumable loan in a spiking interest rate environemnt. I’m not sure about anything, but i am willing to bet there is a large spike in us interest rates sometime in the next 15 years, and i know i’ll want or at leats be willing to sell this house sometime in the next 15 years….

am I overthinking this?

yeah.

Is there any value to my thinking about this?

to me, yes…

ok, so, if payments go up 10% for every 100 bps increase, then if interest rates hit 15% — and I bet they will at some point — a $2,000 house payment will be $4,000. Say the price is flat or even down, but the paymennt is way up. I will have an “asset” (the fha loan) which is worth twice as much as it was previously worth, even in the face of crappy appreciation. it’s not really an asset, obviously, since it’s debt, but it has a super desireable interest rate which is worth a lot.

what am I missing, people? Why in the heck would anyone in his right mind put down 20% unless he was going to pay the loan for sure the full 30 years?

[scaredyclassic]

fha isn’t really the “new subprime” — it may actually be the smart way to make money on real estate in the next 10 years. maybe the only way, if prices are flat. and in a way it makes sense, since one isn’t really buying a home, one is buying a mortgage. the financial decision has less to do with the layout of the house than the features of the loan. what i get for my 20% down is a loan i cannot sell. I wouldn’t buy a house I cannot transfer — why would I buy a loan I could not transfer, unless I was greatly conpensated for that lack of flexibility?

fha is not the new subprime in this sense; when I think subprime, i think unqualified buyers — but fha is qualifying income…

also, subprime has a big interest rate penalty — no so with fha.

i know ive been through this analysis before on fha v. conventional, and run numbers extensively, but i was only analyzing the oppty costs of my down payemnt, and the penalties associated with the fha loan….i wasn’t thinking about the value of an assumable loan in a spiking interest rate environemnt. I’m not sure about anything, but i am willing to bet there is a large spike in us interest rates sometime in the next 15 years, and i know i’ll want or at leats be willing to sell this house sometime in the next 15 years….

am I overthinking this?

yeah.

Is there any value to my thinking about this?

to me, yes…

ok, so, if payments go up 10% for every 100 bps increase, then if interest rates hit 15% — and I bet they will at some point — a $2,000 house payment will be $4,000. Say the price is flat or even down, but the paymennt is way up. I will have an “asset” (the fha loan) which is worth twice as much as it was previously worth, even in the face of crappy appreciation. it’s not really an asset, obviously, since it’s debt, but it has a super desireable interest rate which is worth a lot.

what am I missing, people? Why in the heck would anyone in his right mind put down 20% unless he was going to pay the loan for sure the full 30 years?

[scaredyclassic]

mortgage broker’s blog:

FHA & VA Mortgages Are Assumable
One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable. What this means is that a buyer can “take the payments over” from a seller, if the existing loan is a FHA mortgage or VA home loan.

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%. I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher. Left unchecked, inflation could drive mortgage rates into double digits by 2012. The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough…unless you can offer the buyer a below market interest rate. Let’s assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan. His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%. The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that’s over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market). Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called. Pragmatically, that doesn’t happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years. You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash. That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.

[scaredyclassic]

mortgage broker’s blog:

FHA & VA Mortgages Are Assumable
One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable. What this means is that a buyer can “take the payments over” from a seller, if the existing loan is a FHA mortgage or VA home loan.

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%. I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher. Left unchecked, inflation could drive mortgage rates into double digits by 2012. The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough…unless you can offer the buyer a below market interest rate. Let’s assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan. His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%. The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that’s over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market). Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called. Pragmatically, that doesn’t happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years. You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash. That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.

[scaredyclassic]

mortgage broker’s blog:

FHA & VA Mortgages Are Assumable
One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable. What this means is that a buyer can “take the payments over” from a seller, if the existing loan is a FHA mortgage or VA home loan.

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%. I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher. Left unchecked, inflation could drive mortgage rates into double digits by 2012. The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough…unless you can offer the buyer a below market interest rate. Let’s assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan. His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%. The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that’s over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market). Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called. Pragmatically, that doesn’t happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years. You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash. That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.

[scaredyclassic]

mortgage broker’s blog:

FHA & VA Mortgages Are Assumable
One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable. What this means is that a buyer can “take the payments over” from a seller, if the existing loan is a FHA mortgage or VA home loan.

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%. I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher. Left unchecked, inflation could drive mortgage rates into double digits by 2012. The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough…unless you can offer the buyer a below market interest rate. Let’s assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan. His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%. The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that’s over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market). Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called. Pragmatically, that doesn’t happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years. You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash. That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.

[Author]

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