How to put a price on the value of a assumable low rate mortgage?

[GON]

How does a buyer place a value in a assumable mortgage on a single family home?

Came across a single family home, $570k asking price. 27 1/ 2 years left on the mortgage, 2.25 percent interest rate. $460k balance on the mortgage. House is being listed at about $30 per square foot higher than other homes in the subdivision.

How does one place a value on a reduction in interest rate of about five percent over current rates?

 

[99Saturn]

Can easily price what carrying a mortgage to term at today's rates versus the assumable rate. Have to make a bunch of assumptions beyond that about how long one is going to live there, what interest rates will be in the future, etc. etc.

Guessing there is a "wow" factor factored in at 2.25% for 27.5 years.

 

[eljefino]

Does the bank have to approve the party assuming the note? I can see them being picky.

 

[PandaBear]

Do a similar mortgage amortization and see how much you pay in total vs the one you assume with a slight discount. This is like buying bond in the second hand market.

 

[GON]

Can easily price what carrying a mortgage to term at today's rates versus the assumable rate. Have to make a bunch of assumptions beyond that about how long one is going to live there, what interest rates will be in the future, etc. etc.

Guessing there is a "wow" factor factored in at 2.25% for 27.5 years.

That's a good point. Should also add that if I assume the loan, I can also sell the property with the assumable loan.

 

[SC Maintenance]

Take whatever the current rate is, put it in a calculator, and figure out how much less you owe at the point you think you will sell the house. Then do the same with a new loan paying the same amount per month at todays rates - which will be a much longer term. So in 10 years if say the amount owing is $20K less on the existing loan - you can calculate the Present value given future value - also an easy to find formula.

There are more complex ways to do it - ie present value given annuity formula's - compare current vs new loan - just realize you need to invert the number since those formula's will give it as payments to the lender - ie if its $20K better for the lender one way, then it means it $20K more expensive to you as the payer.

Just google the formula's https://www.financialmentor.com/calculator/present-value-of-annuity-calculator

 

[99Saturn]

$445k interest differential if carried to term.

Edit: assuming 5% higher rate today.

 

[GON]

Take whatever the current rate is, put it in a calculator, and figure out how much less you owe at the point you think you will sell the house. Then do the same with a new loan paying the same amount per month at todays rates - which will be a much longer term. So in 10 years if say the amount owing is $20K less on the existing loan - you can calculate the Present value given future value - also an easy to find formula.

There are more complex ways to do it - ie present value given annuity formula's - compare current vs new loan - just realize you need to invert the number since those formula's will give it as payments to the lender - ie if its $20K better for the lender one way, then it means it $20K more expensive to you as the payer.

Just google the formula's https://www.financialmentor.com/calculator/present-value-of-annuity-calculator

Thanks SCM.

Does the calculator also include the potential benefits of a lower payment, and redeploying that saved capital into other investments?

Fictional example:

2.25 percent monthly payment of $2500
7.5 percent monthly payment of $5000

After five years, the payment difference is $150k USD. If one can get four percent on savings, maybe after five years that $150k USD with interest is $170k USD. Is the savings of capital figured I to the math, or should it even be part of the valuation of the reduced interest rate?

 

[GON]

Does the bank have to approve the party assuming the note? I can see them being picky.

Yes, the assumption requirement is a 700 credit score and a under 40 percent debt to income, employment projected for one year out, and buyer must occupy the home..not to overwhelming requirements.

 

[SC Maintenance]

Thanks SCM.

Does the calculator also include the potential benefits of a lower payment, and redeploying that saved capital into other investments?

Fictional example:

2.25 percent monthly payment of $2500
7.5 percent monthly payment of $5000

After five years, the payment difference is $150k USD. If one can get four percent on savings, maybe after five years that $150k USD with interest is $170k USD. Is the savings of capital figured I to the math, or should it even be part of the valuation of the reduced interest rate?

So in your example you would need to add the additional step of calculating future value given an annuity - and using your $2500 contributed monthly to the annuity and the savings interest rate, and the term you plan to keep this, then add that back in at the end.

The issue you have with all of these formula's is your calculating based on current rates. For example in if interest rates go down in the future, you refinance. If rates go up, your $2500 into savings makes more.

When you assume this mortgage - how much are the closing costs? There could be a lot of closing costs savings up front as well - like loan origination and such?

 

[Cujet]

$445k interest differential if carried to term.

Edit: assuming 5% higher rate today.

If rates decline in the future, a conventional loan on a comparable house next door can often be refinanced.

The avg length of home ownership is 12 years, so my calculation is 50% of the savings over that period of time is the absolute upper limit.

That $110K minimum down payment has a lost opportunity cost also.

What should the price of the house be?

EDIT: Thinking aloud here, paying too much carries a real risk of loss during a forced sale.

 

[GON]

So in your example you would need to add the additional step of calculating future value given an annuity - and using your $2500 contributed monthly to the annuity and the savings interest rate, and the term you plan to keep this, then add that back in at the end.

The issue you have with all of these formula's is your calculating based on current rates. For example in if interest rates go down in the future, you refinance. If rates go up, your $2500 into savings makes more.

When you assume this mortgage - how much are the closing costs? There could be a lot of closing costs savings up front as well - like loan origination and such?

The closing costs are a half percent of the mortgage balance.

 

[GON]

If rates decline in the future, a conventional loan on a comparable house next door can often be refinanced.

The avg length of home ownership is 12 years, so my calculation is 50% of the savings over that period of time is the absolute upper limit.

Nobody can guess future interest rates. With the significant rise in US debt and deficit, wonder how likely rates will be able to return to historical lows that we saw three years ago?

 

[SC Maintenance]

So really, really, really rough math. Using your numbers.

Your paying $1000 a month more with a new loan on a 30 year fixed. So $12K per year.

On current loan in 3 years, the amortization tables show the amount remained owing on the two loans being about $35K difference. And you would have paid $36K more in payments.

So the ROI on the $70K appears to be about 3 years.

And now you know why so few can afford houses vs a few years ago.

Run the numbers yourself - in case I fat fingered something: https://www.calculator.net/loan-cal...ayback=month&x=Calculate&type=1#monthlyfixedr

 

[99Saturn]

If rates decline in the future, a conventional loan on a comparable house next door can often be refinanced.

The avg length of home ownership is 12 years, so my calculation is 50% of the savings over that period of time is the absolute upper limit.

That $110K minimum down payment has a lost opportunity cost also.

What should the price of the house be?

EDIT: Thinking aloud here, paying too much carries a real risk of loss during a forced sale.

Very true good points. I don't really disagree, but I can tell you buying our current home I wasn't thinking, "I'm going to be here ~ 12 years" because that's the average time people stay in their home. Not sure I would have said "we'll be here forever" if asked either. Likely moving soon and I could just as easily see being in our next house 2-3 years or 15-20 years. The opportunity cost comment resonates to me too, at current interest rates I am considering paying cash but the opportunity cost is weighing on me, especially if carrying two places for a while.

 

[BMWTurboDzl]

Nobody can guess future interest rates. With the significant rise in US debt and deficit, wonder how likely rates will be able to return to historical lows that we saw three years ago?

Never

 

[midnightlaundry]

And you thought orange man was bad..LOL

 

[Tharber]

There are several ways to calculate this but the easiest would be to plug the numbers into a compound interest calculatr that you can find online. That will give you the dollar differences, however, you would need to also calculate capitol accumulation over the same period to find out if that money would grow more somewhere else at any given rate. Depending on how finite you want to get, don't forget that mortgage interest is a tax deduction so you would also need to calculate pre and post tax benefits of the mortgage as well as the addition of capitol accumulation and what, if any effect those dollars might have.

As a general rule of thumb, TVM, (time value and money) shows that a dollar today is worth more than a dollar tomorrow if it is invested into anything.

TH

 

[GON]

As a general rule of thumb, TVM, (time value and money) shows that a dollar today is worth more than a dollar tomorrow if it is invested into anything.

TH

Tim,

Very helpful and thought-provoking quote.... thank you.