The Truth About Assumable Mortgages: The Down Payment Dilemma

When you’re buying a home in St. Louis, you may hear about assumable mortgages as a way to save money, especially with today’s rising interest rates. At first glance, they sound like a dream solution: take over a seller’s existing low-rate mortgage rather than securing a new loan at a higher rate.

But while assumable mortgages can offer attractive rates, there’s a significant catch that often makes them impractical: the down payment requirements. Let’s break it down.

What Are Assumable Mortgages?

Assumable mortgages allow a buyer to take over the seller’s existing mortgage, including its:

• Low interest rate
• Remaining loan term
• Current outstanding balance

For example, imagine the seller locked in a 2.75% rate on a 30-year fixed mortgage five years ago. If they’re selling today, you could inherit that low rate rather than financing a new loan at around 7%. Sounds great, right?

Here’s the issue: the difference between the home’s selling price and the remaining mortgage balance has to be paid upfront, and it’s usually a hefty amount.

The Down Payment Challenge

Let’s look at a realistic St. Louis scenario:

• Original Loan Amount: $500,000
• Outstanding Balance Today: $442,000
• Current Home Value: $700,000

The buyer would need to cover the difference between the sales price and the remaining mortgage balance—roughly $258,000—as the down payment.

This isn’t your typical 5% or 20% down payment; this represents nearly 36% of the purchase price. For most buyers, that kind of cash isn’t available.

Can a Second Mortgage Bridge the Gap?

If you don’t have $258,000 cash, one option is to take out a second mortgage to cover part of the difference. For example:

• First Mortgage (Assumable): $442,000 at 2.75%
• Second Mortgage: $200,000 at 8%

The blended interest rate across these loans would be approximately 4.4%, which is better than today’s average mortgage rate.

However, with some forecasts predicting rates in the 5% range or lower in the near future, refinancing into a low-5% rate might be simpler and more cost-effective than pursuing an assumable mortgage.

Are You Buying the House for the Mortgage?

Another potential downside is that focusing on assumable mortgages could limit your options. You might end up choosing a home you’re less excited about simply because it offers a lower mortgage rate.

Instead, consider whether the property truly meets your needs. While a low mortgage rate is appealing, the home itself should be the primary reason for your decision.

Additionally, sellers may price their homes higher if they know they’re offering an assumable mortgage, reducing the overall savings.

Why Work with a Local St. Louis Mortgage Expert?

Navigating the complexities of assumable mortgages can be challenging, but you don’t have to do it alone. At Carlson Mortgage, we specialize in helping St. Louis buyers find the best financing options for their unique situations.

Whether you’re exploring assumable mortgages, considering refinancing, or securing a traditional loan, we’ll provide personalized guidance to ensure you make a smart financial choice.

The Bottom Line

While assumable mortgages can look appealing at first glance, the significant down payment requirements and other limitations often make them less practical. Before making a decision, weigh your options carefully and consult a trusted mortgage advisor.

Ready to Secure Your Dream Home in St. Louis?

At Carlson Mortgage, we’re dedicated to helping St. Louis residents navigate the mortgage process and find the perfect loan for their needs. Our experienced mortgage brokers can help you find the perfect loan to fit your needs and budget and will help you make informed decisions about buying a home. Call or text us at (314) 329-7314 or fill out our loan application at www.carlsonstl.com/apply.ved for a purchase or a refinance mortgage, or if you have any general mortgage lending questions.