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Can Refinancing a Mortgage with an FHA Loan Really Increase My Home's Value?

You are probably well aware of most of the benefits available when you refinance a home with an FHA mortgage. You need little equity, and may refinance up to 96.5% of your home's value. You avoid the risk-based pricing adjustments associated with conventional Fannie Mae and Freddie Mac mortgages. And you may even be able to add a home improvement loan to your refinance.

But one top feature of FHA mortgages is often overlooked--the potential for assumability by a future buyer. The assumability feature may one day make your home more desirable, help it sell faster, and even add thousands to the sales price. Here's how.

Why Is Assumability Such a Big Deal?

Some comedian once said, "When you assume, you make an ass of u and me." But he wasn't talking about assuming a mortgage.

Assumability is a big deal because a low interest rate environment doesn't last forever. 2009 and 2010 saw record-low interest rates, but three years before, the average 30-year fixed-rate mortgage interest rate was around 7.75%. If rates return to that level three years from now, and you could offer your home buyers a 5% interest rate, do you think they'd be interested? You bet they would!

Can Anyone Assume Your FHA Mortgage?

It's not your Dad's assumable mortgage--today's buyers who assume an FHA mortgage have to do more than fog a mirror. The new buyer would have to qualify for the mortgage with decent credit and sufficient income.

However, FHA's underwriting standards are still fairly lenient, so most prospective home buyers should experience little trouble assuming your mortgage. And because the lender has pronounced your buyer credit-worthy, once the property is transferred, the lender is required to release you from your loan obligation--you have no contingent liability.

What's an Assumable FHA Refinance Worth to You?

The future value of your mortgage refinance depends on a couple of things, including the interest rate you are able to lock in today, and the prevailing interest rates when you sell your home.

For example: Suppose you refinance your $350,000 mortgage today and lock in a 5% interest rate with a principal and interest (P&I) payment of $1,879. Three years from now, imagine that mortgage interest rates have increased to 7.5% (many analysts consider this scenario realistic), and you owe $333,703 when you put your home up for sale. Other homes in the neighborhood are selling for $380,000, but with an assumable FHA mortgage, your home is worth more. Mortgage expert Jack Guttentag has put together a spreadsheet designed to show exactly how much more.

In this case, assuming the buyer has a 3.5% down payment, plans to stay in the home for 5 years, and can earn 2% on the monthly savings obtained by assuming your mortgage, the loan assumability is likely worth over $50,000. Guttentag notes that buyers and sellers generally split the benefit between them, so a $20,000 premium on your property's price is probably reasonable.

The Buyer's Decision Analyzed:

So just why would the buyer want to pay more for your house than your neighbor's? Consider the buyer's choice via the following two scenarios:

1. The buyer could buy your neighbor's home for $380,000 with a new FHA loan:

  • Put 3.5% down ($13,300)
  • Pay closing costs of 2% ($7,334)
  • Take on a 30-year FHA mortgage for $374,950 ($366,700 plus 2.25% upfront MIP) at a rate of 7.5%

The buyer would then pay a P&I payment of $2,622 for the next 30 years.

2. A buyer might purchase your house for $400,000:

  • Put 3.5% down ($14,000)
  • Pay lender costs (we'll say $500) to assume your FHA loan of $333,703 with its payment of $1,879 for its remaining 27 years
  • Take a 27-year second mortgage from you for $52,297 at 10%, for a P&I payment of $468

The total P&I payment would then be only $2,346, and the home would be paid off in only 27 years. Thus, if the buyer simply purchases your neighbor's house at a 'cheaper' cost, he will pay $275 more monthly than if he bought your home. After the 30 years needed to pay it off, that's nearly $100,000 more!

And because you refinanced with an assumable FHA mortgage, you might sell your home for at least $20,000 more than your neighbor could, plus get $448 a month of extra income at a 10% interest rate--and probably sell your property faster. That's a win-win situation if I've ever seen one.

Maximize Your Earnings

The ultimate value of your FHA refinance is driven by what the market interest rates are when you put your home on the market (you have no control over this), but it's also determined by the refinance interest rate you negotiate with your lender today. So the better job you do when shopping for today's refinance, the more your assumable mortgage might be worth tomorrow.

It's fast and easy to get several quotes for your FHA refinance online. This allows you to quickly compare a lot of interest rate quotes and negotiate the best deal available. This small effort today could pay big dividends tomorrow.

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1 Responses to " Can Refinancing a Mortgage with an FHA Loan Really Increase My Home's Value? "

  1. Milind says:

    The ultimate value of your FHA refinance is driven by what the market interest rates are when you put your home on the market (you have no control over this), but it's also determined by the refinance interest rate you negotiate with your lender today. So the better job you do when shopping for today's refinance, the more your assumable mortgage might be worth tomorrow.

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