The Baker House Newsletter Issue XII
Buy the Rate
Half of America’s mortgages carry rates below 4 percent. On two kinds of federally backed loans, a buyer can take over the seller’s rate. This issue covers which loans transfer, what the takeover costs, and where the rest of the money comes from.
THE LEAD
The Mortgage That Survives the Sale
Half of America’s outstanding mortgages carry interest rates below 4 percent, locked in during the years when money was cheap. A new 30-year loan in October 2026 averages about 7.3 percent. On most houses a sale erases the gap between those two numbers: a conventional mortgage carries a due-on-sale clause, so the sale pays off the cheap loan and the buyer borrows at today’s rate.
Two kinds of loans work differently. FHA and VA mortgages are assumable by federal rule: a qualified buyer can take over the seller’s balance, rate, and remaining term, with the servicer’s approval. The buyer is underwritten the way any borrower is, pays the seller’s equity in cash at closing, and steps into the loan where the seller left it. A house financed in 2021 with an FHA loan at 3 percent can change hands today with that 3 percent loan still on it.
Assumptions were a rounding error while every new loan was cheap, because taking over a 3 percent mortgage means nothing when the bank offers 3 percent to anyone. HUD counted 2,549 FHA assumptions in fiscal 2021 and 5,861 in fiscal 2024, more than double in three years, and in 2024 HUD doubled the fee a servicer can charge for processing one, to get servicers to staff the work. The pool is large and it drains slowly: the homeowners holding those rates have little reason to give them up, which is part of why so few houses are for sale, and why a listing carrying a transferable cheap loan deserves a closer look.
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CHART
Share of all outstanding US mortgages by interest rate, fourth quarter 2025. A new 30-year loan in October 2026 averages about 7.3 percent. Sources: FHFA National Mortgage Database; Freddie Mac Primary Mortgage Market Survey.
THE TURN
An assumption changes what is being bought. The buyer is purchasing two things: the house, and a fixed-rate loan that can no longer be originated at any bank. The loan has cash value of its own. Two identical houses with monthly payments 600 dollars apart will not sell for the same price, so a seller with an assumable 3 percent loan is holding an asset most sellers do not have, and a buyer should expect the price to reflect some of it. The negotiation is over how the value of the cheap loan gets split.
The holding math favors patience. An assumed 2021 loan runs at its original rate for its remaining 25 years, fixed, while rents and replacement rates move. Readers of the house hacking issue will notice the overlap: FHA covers 2-to-4 unit properties, FHA loans are assumable, and an FHA assumption requires the buyer to move in. A buyer who assumes a 3 percent loan on a triplex, lives in one unit, and rents the other two is house hacking with an interest rate the seller locked in five years ago.
Half of America’s mortgages carry rates below 4 percent. The only way to get one now is to take one over.
THE FRAME
One Listing, Two Ways to See It
| WHAT THE MARKET SEES | WHAT A DISCIPLINED BUYER SEES |
|---|---|
| A listing like the others on the street | The one house that comes with a 3 percent loan |
| An asking price above the comparables | A monthly payment below every house around it |
| A slow closing stuck at the servicer | A longer close, priced into the contract dates |
WHAT TO LOOK FOR
The loan on the house. Ask what mortgage the seller carries before negotiating anything else. FHA and VA loans are assumable at the seller’s rate with the servicer’s approval. USDA loans can be assumed too, but an unrelated buyer gets today’s rates and terms, which defeats the purpose. Conventional loans carry a due-on-sale clause, so the sale pays them off. A loan originated in 2020 or 2021 is the one worth asking about, because that is when rates bottomed, and the seller’s answer should be confirmed with the servicer in writing.
The occupancy rule. On FHA loans made after 1989, the assuming buyer must move in as a principal residence, so FHA assumptions belong to owner-occupants, including the house hacker buying a 2-to-4 unit. Published VA guidance sets no occupancy requirement for an assumption, and the servicer’s written answer governs the individual loan.
The equity gap. The price minus the loan balance arrives as cash at closing. A seller who bought in 2021 has had five years of payments and appreciation, so the gap often runs to six figures. Some lenders write second mortgages behind assumptions, the second carries today’s rates, and the blended cost of the two loans determines whether the deal still works. Compute the blend before agreeing to the price.
The approval and the clock. An assumption is underwritten like a new loan: credit, income, and debts, reviewed by the seller’s servicer. VA servicers with automatic authority must decide within 45 days of a complete application, FHA processing fees are capped at 1,800 dollars, and a VA assumption carries a 0.5 percent funding fee plus a few hundred dollars of processing. Servicers staffed this work thinly for a decade, so the contract’s closing date needs slack.
The seller’s side. A VA seller’s loan entitlement stays tied to the loan unless the buyer is a veteran who substitutes their own, and the release of liability is granted on request through the servicer, never automatically at closing. Both belong in the deal terms, because a veteran’s entitlement has real value and a fair offer accounts for it.
HOW THE MATH WORKS
A seller bought in 2021 with a 330,000 dollar FHA loan at 3 percent. The principal and interest payment is about 1,390 a month, and after five years the balance is about 293,000. A buyer who assumes the loan takes over that balance, that rate, and that payment for the remaining 25 years. The same 293,000 borrowed new at today’s rates costs about 2,000 a month, so the assumption saves roughly 600 dollars a month, 7,300 a year, before the buyer negotiates anything. The loan also carries FHA mortgage insurance at 0.85 percent a year, about 210 a month on this balance, and on a 2021 loan with the minimum down payment the insurance runs for the life of the loan, so the honest comparison includes it. The house is priced at 400,000, which means the buyer brings the 107,000 difference in cash plus fees, or finances part of it with a second mortgage at today’s rates and recomputes the blended cost. The assumed rate lowers the payment and does nothing to lower the price, so the house still needs its appraisal and its inspection. A buyer who cannot cover the gap without draining reserves is better served by the ordinary purchase.
THE RISKS
The equity gap concentrates cash: the seller’s equity is due at closing, and a second mortgage that bridges it carries today’s rates, so the blend can give back most of what the assumed rate saved. The low payment also tempts a buyer to overpay for the house itself, and the appraisal matters more here, because part of the asking price is the loan. Servicers process assumptions slowly, closings can stretch past 60 and 90 days, and a seller who needs a fast close may take a conventional offer instead. An FHA assumption requires the buyer to live in the house, and the loan’s mortgage insurance transfers with it for its remaining life. On a VA assumption without a substitution of entitlement, the seller’s benefit stays locked up until the loan is paid, and a buyer who ignores that is taking something of value without paying for it. The category is real, and the individual deal is earned through the underwriting.
THE WIRE
The Rates, the Pool, and the Plumbing
New money is expensive. Freddie Mac’s 30-year average stood at 7.28 percent on October 1 and has since held near 7.4, the highest since November 2023. Every point of rate on a 300,000 dollar balance is roughly 200 dollars a month, so the spread between a 2021 loan and a new one is now worth several hundred dollars a month on an ordinary house.
The cheap loans retire slowly. Mortgages below 4 percent were 50.6 percent of all outstanding loans in the fourth quarter of 2025, down from more than 65 percent at the 2022 peak, per the FHFA’s National Mortgage Database. The share falls a few points a year as households sell or refinance, which means the supply of assumable cheap loans will be part of the market for years.
The processing is being rebuilt. HUD doubled the allowable FHA assumption fee to 1,800 dollars in 2024, and the VA added regional fee allowances the same year, both to get servicers to staff the work. Brokerages now search listings by loan type, and second-lien lenders advertise piggyback loans built to sit behind an assumed first. FHA assumptions grew from 2,549 in fiscal 2021 to 5,861 in fiscal 2024, per HUD data.
Assumability has been written into FHA and VA loans for decades. It mattered little while new money was cheap, and it matters now. The starting question on any listing is what loan sits on the house.
OFFICE HOURS
Whether an assumption fits your next purchase, how to find listings with assumable loans, how to bridge the equity gap, and when the ordinary mortgage is the better deal: Richard takes questions on all of it every Wednesday at 2pm ET in his free office hours. He answers whatever attendees ask, live, for an hour. If this issue raised a question for you, bring it.
SOURCES
- FHFA National Mortgage Database, outstanding mortgages by interest rate, Q4 2025: 19.7 percent below 3 percent; 30.9 percent at 3 to 3.99; 16.8 percent at 4 to 4.99; 10.6 percent at 5 to 5.99; 21.9 percent at 6 and above.
- Freddie Mac Primary Mortgage Market Survey: 30-year fixed average 7.28 percent, October 1, 2026; roughly 7.4 percent mid-October, the highest since November 2023.
- HUD data on FHA loan assumptions, via ResiClub: 2,549 in FY2021; 2,578 in FY2022; 4,060 in FY2023; 5,861 in FY2024. HUD Handbook 4000.1: assumption processing fee cap raised to $1,800 (2024); assumptions of post-1989 FHA loans require owner occupancy; 2021-vintage annual mortgage insurance 0.85 percent, life of loan at under 10 percent down.
- VA assumption rules and Circular 26-24-5: 0.5 percent funding fee; processing fees of $250 to $300 plus regional allowances; 45-day decision requirement for servicers with automatic authority; substitution of entitlement and release of liability procedures.
- USDA Rural Development Handbook-1-3550: loans assumed by eligible unrelated buyers are reamortized at new rates and terms; assumption at original rates and terms is generally limited to transfers between family members.
- Garn-St Germain Act, 12 USC 1701j-3: due-on-sale clauses enforceable on ordinary sales of conventionally financed homes, with listed family and trust exceptions.
- Payment figures in How the Math Works are illustrative: a $330,000 loan at 3 percent (2021) against the same balance at 7.25 percent; actual terms vary by loan.