Assumable loans rebound

February 20, 1994|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff Writer

The assumable fixed-rate mortgage is making a comeback, as lenders target consumers who remember -- and expect a return to -- the days of high interest rates.

Such loans, once a staple of the mortgage business, let qualified buyers assume a seller's mortgage at the same interest rate. The rates on these loans, however, are slightly higher than those on conventional mortgages.

Only about 20 small mortgage brokers and several other lenders in Maryland offer the loans. But if borrowers continue to believe that interest rates have bottomed out and will start to rise, assumable loans could come back in vogue, mortgage financiers said.

"The big problem every move-up buyer has is selling his old house, and [assumable loans] would be an edge to sell the old house," said Richard Loeffler, vice president for product development for Columbia-based First Advantage Mortgage Corp. "I wish I could say I had it. It sounds like it would be popular. But that is an unusual product."

Like many lenders, First Advantage sells loans to investors who do not allow fixed-rate loans to be assumed.

"Most mortgage brokers originate their loans to Fannie Mae or Freddie Mac guidelines," said Charles "Chic" Reid, president of the Maryland Mortgage Bankers Association.

Mr. Reid said most lenders sell their loans on the secondary market and must follow Freddie Mac and Fannie Mae guidelines, but lenders who hold on to their loans may allow assumable loans.

McLean, Va.-based Abbot Mortgage Services, with branches in Columbia and Bethesda, began offering assumable fixed-rate loans about two months ago. Customers have chosen such loans both to refinance existing loans or for new mortgages.

Assumables appeal to "folks who knew a higher rate environment, folks in their 40s who have a house now, baby boomers who were involved in housing in the early 1980s when the rates were high," said Joseph Mahoney, company president. "You have an edge if the rates go up and you have a better-than-market rate that can be assumed."

Some of his customers had not refinanced their mortgages because they intended to sell their home in just a couple of years and didn't want to pay closing costs for such a short-term loan. But now, some of those homeowners have an alternative in assumable mortgages.

These homeowners would still pay closing costs but could take a chance that rates would rise over the next few years, making their assumable loans more valuable. If rates dropped, they would lose the bet.

"They're using the plan to drop their payments and put the interest rate into play for the sale of the house," Mr. Mahoney said.

The loans also help buyers who assume such mortgages because they pay less in closing costs, Mr. Reid said.

Charlotte, N.C.-based BarclaysAmerican Mortgage Corp., which buys loans from originating lenders, started an assumable fixed-rate program a couple of months ago, working through a network of about 20 small lenders scattered throughout the Maryland.

Hedge against increases

"I think it's a good program simply because interest rates are at 25-year lows, and it gives the borrower the option to insure against future interest climbs when it comes time to sell a home," said Steve Buonanno, vice president in charge of wholesale lending in the Columbia regional office. "If anyone sold a home in 1979 or 1980, if you had an assumable with a fixed rate the home sold faster. This is good way to buy insurance to hedge against interest rates going up."

Assumable fixed-rate loans remained common until the late 1970s, when rates began rising. Assumable loans with below-market rates became unprofitable for banks and investors.

"With the increase and run-up in rates in the late 1970s, assumables went away," Mr. Mahoney said. "With the drop in rates in the 1990s, it's coming back."

Besides recognizing a market for assumable loans, some lenders may view the loans as a way to cut origination costs, he said.

SG "It's simpler and less costly to do an assumption," Mr. Reid said.

It'll cost you

Consumers should expect to pay, though, for what amounts to insurance on the interest rate. The interest rate on assumable loans is typically one-quarter to five-eighths of a percentage point higher.

For example, Abbot offers a conventional 30-year fixed mortgage, with no points, for 7 1/4 percent. A rate for a comparable assumable loan is 7 3/4 percent. And it usually can be assumed only once.

One disadvantage

The disadvantage of an assumable loan can be that rates might not rise, Mr. Mahoney says.

"If rates stay where they are, you've paid for something you're not using," he said.

Since Abbot began offering assumable mortgages, "nine out of 10 times the buyers still opts for the lower rate," Mr. Mahoney said.

"If rates should go up, it will become more popular," agreed David Chisholm, senior vice president for Annapolis Federal Savings, which sells its loans to investors who do permit assumptions.

4 Customers rarely ask about them though, he said.

"The consumer is more rate-conscious and more point-conscious than whether it's assumable," Mr. Chisholm said.

SELLER DISCLOSURE

Since Jan. 1, seller's have been required to give to buyers a form listing the condition of the house -- from the foundation to the plumbing, from the heating system to the presence of termites.

Now that the forms have been around for a couple of months, The Sun wants to know how the system is working. Are the forms difficult to fill out? Do buyers find them confusing? Are they easy to get a hold of?

Call Sundial, The Sun's telephone information service, at (410) .. 783-1800. In Anne Arundel County call 268-7736; 836-5028 in Harford County; 848-0338 in Carroll County. Using a touch-tone phone, punch in the four-digit code 6145 after you hear the greeting.

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