Millions of borrowers are locked in to low-rate mortgages, which regulators, the press, and researchers agree is suppressing home sales. One solution that some stakeholders have floated are assumable mortgages, which allow a qualified homebuyer to assume the seller’s remaining mortgage balance at the seller’s current interest rate.
The idea is sound in theory. A seller could monetize the value of their low interest rate by asking for a higher selling price, with the buyer saving money on monthly payments.
On a $300,000 existing mortgage, for example, monthly principal and interest is about $1,900 at 6.5 percent interest but roughly $1,350 at 3.5 percent interest. If the lower-rate mortgage were assumed, the buyer may be willing to offer more for the home because they would save $550 on their mortgage payment each month, equal to about a $33,000 lump sum, discounted and accounting for the typical mortgage duration. This higher price could induce the current owner to consider selling.
In reality, assumable mortgages would need considerable policy accommodation to be an attractive option, would likely result in higher monthly payments for new borrowers who aren’t assuming existing mortgages, and would not dramatically alleviate housing supply concerns. Here, we outline four shortcomings of an assumable mortgage option that policymakers would need to address for the policy to be effective.
1. Applicability to Fannie Mae and Freddie Mac loans is limited to future loans
Existing mortgages sold and securitized through Fannie Mae or Freddie Mac have a clause requiring the mortgage to be due on the sale of the home, and this rule cannot be changed retroactively by the Federal Housing Finance Agency or by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, themselves.
Further, most GSE mortgages have been sold into securitized pools, without any provision to change contractual clauses. Even if a mechanism did exist, mortgage-backed securities (MBS) investors would not agree to it, as that would considerably lower the value of their securities.
2. Appeal to sellers and first-time homebuyers is limited because of appraisal issues and down payment constraints
Existing assumable mortgage options indicate that a broader assumability policy may not dramatically change behavior on future loans. Mortgages backed by the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA), and the US Department of Agriculture are already assumable, yet few of those loans are assumed. In fiscal year 2024, fewer than 6,000 FHA loans were assumed out of 7.8 million outstanding mortgages.
Two main obstacles make it hard to assume a mortgage, with both disproportionately affecting first-time homebuyers who are low on cash and are often putting less than 10 percent down.
First, the buyer needs to make up any difference between the assumed mortgage amount and the purchase price—the equity gap. If a seller had a $300,000 mortgage on a home worth $400,000, the equity gap would be $100,000. A buyer could make a huge down payment or take out a second lien to cover that gap, but first-time buyers are low on cash, and second liens have much higher interest rates in the current environment. Further, second liens are typically limited to borrowers with 20 percent or more in equity, eliminating buyers who cannot make a 20 percent down payment.
Second, even if the buyer is willing and able to pay more for the home because it comes with a low-rate first mortgage, the additional offered value would likely not be supported in the appraisal, which could derail the sale or require the buyer to make an even larger down payment.
3. Current mortgage interest rates would increase if future lock-ins are prevented
Even if the obstacles above were overcome and assumable mortgages become the standard, national mortgage interest rates would likely increase as a result. Currently, MBS investors provide the funding for most of the US mortgage market. Those investors’ main risk is the situation that has transpired the past few years: low interest rates on 30-year mortgages suddenly skyrocket, leaving investors with a much-depreciated low-yield stream of payments.
In a high-rate environment, investors want their money back quickly to reinvest at the higher rate. But refinances are slow, and home sales are a major source of prepayment activity. Assumability would significantly depress home sale–driven prepayments in a higher-rate environment, so investors would need a wider rate spread to compensate.
Sources: GSE home sales from Ross M. Batzer, Jonah R. Coste, William M. Doerner, and Michael J. Seiler, The Lock-In Effect of Rising Mortgage Rates, Working Paper 24-03 (Division of Research and Statistics, Federal Housing Finance Agency, 2024); first-lien refinances from annual Home Mortgage Disclosure Act reports; and average 30-year mortgage rates from the Primary Mortgage Market Survey.
In the late 1970s, when interest rates rose dramatically, 18 states stopped lenders from enforcing due-on-sale mortgages, effectively making mortgages assumable. The Federal Home Loan Bank Board (one of the Federal Housing Finance Agency’s precursors) sought federal preemption to stop state-driven assumability, which was enacted as a provision in the Garn-St Germain Act of 1982, and published a report on the topic. The report estimated that the difference in MBS rates might be around 40 basis points if mortgages were widely assumable. This pricing bump does not apply to current FHA and VA mortgages because assumability is exercised so rarely.
The late 1970s was an extreme case, but if assumable mortgages did eliminate many home sale–induced prepayments during high-interest-rate periods, prepayment speeds would drop substantially and MBS investors would require higher rates of return. If instead borrowers could opt to pay more for an assumable mortgage, this option would not disrupt the mortgage market. But these mortgages would be difficult to incorporate into pools of standard mortgage-backed securities, creating an additional liquidity premium on the product.
If we assume a 40 basis-point difference, it is unclear who would be willing to pay an extra $100 a month on a $400,000 loan for the option to potentially obtain better offers from future buyers if interest rates increase. If only a small share of borrowers opt into assumable mortgages, search and operational costs would rise, making it less likely that robust second-lien products develop.
4. Assumable mortgages would not address supply shortages
Lastly, assumable mortgages, even in a future where everyone has one, would not solve the housing supply problem because sellers still need a place to live. Almost all locked-in homeowners would buy another home if they sell their current home, so they are sellers and buyers at the same time. In other words, lock-in reduces real estate market liquidity by taking both buyers and sellers out of the market and reallocates supply (e.g., existing borrowers locked in to starter homes means fewer starter homes are available to first-time buyers). Lock-in does not reduce the overall supply.
Assumability cannot solve today’s housing crisis. If policymakers wish to stimulate the housing market, they need to address affordability by creating more supply. They can do so by catalyzing new construction of all home types—single-family homes, multifamily homes, accessory dwelling units, and manufactured housing. This will require states and localities to relax zoning rules and loosen regulatory requirements and timelines to reduce the costs of new construction.
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