Recent fee increases have made FHA mortgages less attractive than they used to be. However, there's still one big financial benefit that they offer, particularly if you plan to move again in a few years. row of houses5

It's an often-overlooked feature, but FHA mortgages are assumable. That means when it comes time to sell the home, you can simply transfer the mortgage to the new buyer, rather than having them taking out a new home loan.

What makes this a particularly appealing feature is that mortgage rates are dirt cheap right now. And very few expect them to stay that way over the long term.

As a result, your home could include a very attractive feature when the time comes to sell it in five or 10 years - an FHA mortgage with an unusually low interest rate. That's assuming mortgage rates increase over the next few years, as it seems likely they will.

Current rates vs. future rates

Everyone knows that mortgage rates are unusually low right now. But that's only part of the story. Mortgage rates are PHENOMENALLY low. People were amazed when 30-year loans fell to then-record lows of about 4.5 percent in 2009. Since then, they've fallen more than a full percentage point, though they've come back a bit from their all-time lows of late last year.

No one knows where mortgage rates will be in five to 10 years, but it's a good bet they'll be higher than they are now. Prior to the downturn, mortgage rates over the past decade held pretty much in the 5 to 7 percent range. They ranged from 7 to 9 percent during the 1990s and the 1970s before that, and spent almost the entire 1980s in double figures. Eventually, it seems likely that they'll return closer to historic norms.

So if you can offer someone a house with a 30-year mortgage at 3.75 percent when prevailing rates are in the 6 to 8 percent range, for example, that's going to be a pretty attractive deal. You could even get a better price for it than you would if they buyer had to get their own financing at prevailing rates.

FHA fees are higher

A few things to be aware of. First, FHA mortgages come with some fairly steep costs for mortgage insurance, which will affect any new buyer as well. There's an upfront fee of 1.75 percent of the loan amount, although that can be rolled into the loan.

There's also an annual mortgage insurance fee, which runs considerably higher than private mortgage insurance (PMI) on conventional loans. A standard FHA 30-year mortgage with 5 percent down has an annual insurance fee of 1.3 percent of the loan amount, compared to 0.78 percent for PMI on a conventional mortgage.

The FHA has raised these fees multiple times in recent years, so it's quite possible they could go even higher. Then again, as the housing market stabilizes, it's possible they could be reduced as well.

VA mortgages are also assumable but have lower fees than FHA loans, so if you can qualify for one of those you'll want to investigate that option first.

Buyer may need a second mortgage

Another thing to bear in mind is that an assumed mortgage may not cover the full purchase price of the home, so the buyer may have to take out a second mortgage to cover the difference. After all, if you've been paying on a 30-year mortgage for 10 years, the remaining balance will be lower than when you first started out. If the home's value has increased as well, the size of the second mortgage or amount of the down payment the new buyer must bring to the table will be larger as well.

Your lender may also have something to say about a new borrower assuming your FHA mortgage. While the FHA allows its mortgages to be assumed, that's subject to the approval of the lender servicing the mortgage. The servicer may also have its own credit and underwriting standards that may exceed those of the FHA.

Other things to note

FHA mortgages also may not be assumed by someone who is carrying student loan debt, which may eliminate a big chunk of potential first-time buyers, if your home is in that price range.

When selling your home and transferring an FHA mortgage to a new buyer, you also have to make absolutely sure you obtain a liability release from your mortgage servicer, so that you're in the clear if the new owner defaults on the payments.

It's not a cut-and-dried, but the assumable aspect of FHA mortgages makes them an option well worth investigating for potential homebuyers, particularly if you're not planning to stay in the home long-term and expect mortgage rates to return to more typical levels in the years to come.

 

Published on April 13, 2013