Real Estate Toronto Canada

I’ve talked a lot about advantages of FHA mortgages lately. FHA is the only low down payment program left standing, and with conventional guidelines tightening continually, more and more home buyers (including many who can qualify for conventional financing) are finding FHA to be the best alternative. Most of the reasons people choose FHA is because FHA works best for their present situation (the advantages include lower down payments, more flexible credit standards, better approval guidelines for condos, and the list goes on). But there is one big reason why borrowers might look at FHA not for what it offers now, but for the future benefits. If you finance with FHA now, your home may be worth more when you go to sell it some time down the road.

One of the great features of FHA mortgages (and VA mortgages) is that these loans are assumable. What that means is that when you go to sell your home, the new buyer can take on your loan under the same terms as what you have. This doesn’t mean much if interest rates stay low, like they are now, but if interest rates rise, this could be a huge advantage for the home buyer, and for you. It’s easy to see why this will be a benefit for the new home buyer, if rates are at 7.0% and the new buyer is able to take on your mortgage at 5.0%, they are seeing an immediate savings in their monthly payment. This could be a difference of hundreds of dollars per month. The new buyers will need to make up the difference between what you are selling for and your current balance, but for a qualified buyer, your mortgage makes your home a bargain. But being able to offer a better mortgage to your future buyer, is also a big advantage for you as the seller.

The assumable mortgage helps the seller in two ways:

1. It makes it easier to sell than comparable homes – If you offer a home with lower payments then comparable properties, this gives you a competitive advantage and a reason why buyers would want to buy your home over others.
2. Home buyers will actually pay more – Think about it, the value of anything breaks down to what people can afford to pay for it. When you buy a car, they don’t focus on the total cost of the car, they focus on the payments. Whenever the auto companies have a sale, they don’t lower the price, they lower the interest rate (0% financing for qualified buyers!). If a future buyer plans to live in the home long term, that difference of hundreds of dollars each month makes the home more valuable to them, and means that they will pay thousands more for the privilege of taking over your mortgage.

This concept hasn’t been in a factor in years because FHA mortgages were a small slice of the overall mortgage market, and rates were so low it was easier for home buyers to get their own financing. But back in the eighties this was a BIG thing. With inflation high, mortgage interest rates in the early 1980s skyrocketed up to the high double digits. Few could afford conventional financing at these high rates, so the biggest way to sell homes was with “creative financing”. This often meant taking over assumable mortgages and using seller financing (where the seller would take back part of the profit as a second mortgage). Back then homes with assumable mortgages were much more likely to sell, and to sell higher than other homes.

No one knows for sure how high interest rates will rise down the line, but it is a safe bet they will be higher. Mortgages now are at the lowest rates we’ve seen in 40 years. Rates have been kept low due to the Feds mortgage buying program (which ends this Spring) and with all the government borrowing over the last year to keep the economy afloat, at some point inflation is going to raise it’s ugly head and mortgage rates will be much higher. I don’t think we are going to have the hyper-inflation that some are calling for, but a few years from now, people will look at mortgages in the 5% range as once in a life time bargains. This isn’t the main reason home buyers should look at FHA when they buy their home, it is more like icing on the cake, and one more benefit to keep in mind.

Peter Thompson 630-479-6424

Illinois Mortgage Rates                   First time home buyer loans

Downers Grove Mortgage Company