Assumable Mortgage: Ultimate Hack to the Cost of Living in Hawaii?

Beyond its postcard-perfect views, Living in Hawaii offers a unique lifestyle of melded cultures, an embrace of nature, and a sense of community like no other. However, these idyllic visions are often met with the reality of Hawaii's incredibly high living expenses.

While its cultural blend, tight-knit communities, and unparalleled beauty beckon many, the financial hurdle prompts a moment of pause, especially as escalating interest rates further compound the cost of living in Hawaii.

Despite the myriad of financing options available to would be Hawaii homebuyers, none move the affordability needle quite like the "assumable mortgage." In the ever-evolving Hawaii real estate market, this feature can potentially save homeowners a significant amount, and it's worth diving deep into its intricacies.

What is an Assumed Mortgage?

At its core, a mortgage assumption is when a homebuyer takes over, or "assumes," the seller's mortgage. This means the buyer is agreeing to adopt the existing loan's terms, interest rates, and balance, rather than securing a new mortgage. Historically, mortgage assumptions have been around for quite some time, but their popularity and feasibility have oscillated based on market conditions.

In periods when interest rates skyrocket, the attractiveness of taking on an older, lower-rate mortgage becomes palpable. The option to assume a mortgage in Hawaii has become increasingly popular as interest rates have shot from the high 2% range in 2021 to cresting the 7% mark in August 2023. Conversely, during times of low-interest rates, the appeal might diminish. Here's an example of example of how mortgage payments contrast from 2021 to 2023, using a $500,000 and $1,000,000 loan amount:

The evolution of the mortgage assumption has been marked by changing regulations, lender policies, and economic fluctuations. In the context of the VA loan in Hawaii, an assuming mortgage is a feature that distinguishes it from many conventional loans. The Department of Veterans Affairs allows non-veterans to assume mortgages, offering an added layer of flexibility and allure, especially in high-stakes markets like Hawaii.

However, while the basic premise remains the same, the process, requirements, and implications can vary, making it essential to understand the nuances before diving headfirst into an assumption agreement.

VA Mortgage Assumption Benefits

Why consider mortgage assumption, especially in Hawaii? Here's a glimpse of its myriad advantages:

1. Lower Interest Rates: If the existing loan has an interest rate lower than current market rates, the buyer stands to save considerably over the loan's lifetime.

2. Avoidance of Closing Costs: Traditional mortgages often come laden with numerous closing costs. With an assumption, many of these costs are sidestepped, leading to immediate savings.

3. Beneficial for Sellers: Sellers can benefit from an easier and quicker sale, especially if they're offering an attractive interest rate that's lower than the current market trend.

4. Flexibility of VA Loans: Particularly for VA loans in Hawaii, the assumability feature can be a major draw, as it offers flexibility and can be an enticing selling point.

Use your Hawaii BAH to Assume a Mortgage

For military personnel that PCS to Hawaii, the Basic Allowance for Housing (BAH) can be a significant financial advantage when considering homeownership in the islands. Using your Hawaii BAH towards an assumable mortgage can be a savvy move, allowing you to step into an existing home loan often with favorable interest rates and terms compared to initiating a new mortgage.

In Hawaii's competitive and high-priced real estate market, this approach not only maximizes your housing allowance but also provides an opportunity to invest in a property, turning a temporary posting into a long-term investment.

By merging the benefits of BAH with the potential savings from an assumable mortgage, service members can navigate Hawaii's real estate waters with enhanced financial flexibility and foresight.

Downsides of Assumable Mortgages

While there are many benefits to assume a mortgage, especially in a place as sought-after as Hawaii, there are potential pitfalls that every buyer and seller should be aware of:

1. Equity Payments: If a property has substantial equity, a buyer may need to pay the difference between the loan balance and the property’s sale price, which can be a sizable amount.

2. Potential for Higher Interest Rates: If current market rates are lower than the existing loan's rates, an assumption might not be financially beneficial for the buyer.

3. Assumption Fee: While bypassing many traditional closing costs, buyers may still be subject to an assumption fee, which can add to the upfront costs.

4. Loss of VA Entitlement: For veterans selling their homes, allowing their VA loan to be assumed by a non-veteran may tie up their VA entitlement until the assumed loan is fully paid off.

5. Potential Liability: If the buyer defaults on an assumed mortgage, the original borrower (the seller) might face liability unless they obtain a release from the lender.

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Assumable Mortgage Homes For Sale in Hawaii

The vast majority of Hawaii Military Bases are located on the island of Oahu which makes the Oahu Real Estate Market especially popular for VA homebuyers and would be sellers. The neighborhoods with close proximity to these bases are going to offer you the most amount of opportunity to find a seller willing to accept a loan assumption.

If you're looking for assumable mortgage listings, check out our Oahu Neighborhood Guides below to help familiarize yourself with some of Oahu's most popular neighborhoods for Military Personnel. When you're ready to start a conversation about your real estate plans, reach out to us! We would love to help you curate your home search and find home in Hawaii. 

How to Assume a Mortgage

Embarking on the journey of mortgage assumption requires a blend of diligence, preparation, collaboration with your trusted Hawaii Real Estate Agent to help you negotiate a VA loan assumption option with the seller and seller's agent, but to also keep all parties cognisant of the contract timelines in the likely event that extensions are needed. Here's a step-by-step guide to help navigate the waters:

1. Initial Agreement Between Buyer and Seller: Before anything official happens, the buyer and seller need to come to an agreement about the assumption. It's often wise to seek preliminary legal counsel to ensure both parties understand the implications.

2. Contact the Current Lender: Since not all mortgages are assumable, the next step is to get in touch with the seller's lender. This will allow you to confirm whether the mortgage is assumable and gather details about the process and requirements.

3. Compile Required Documentation: Lenders will typically require a plethora of documents, including but not limited to the buyer's credit report, financial statements, and employment verification. It's essential to have all this in order to move forward smoothly.

4. Assumption Approval: The lender will evaluate the buyer's creditworthiness and financial stability. If approved, the process can move forward. However, rejection means the buyer must seek alternative financing.

5. Legal Documentation: Once approved, both parties will need to work on the assumption agreement, which will detail the terms and conditions. It's advisable to involve a real estate attorney to ensure all legalities are in place.

6. Finalizing the Assumption: Once all the paperwork is in order and all parties are in agreement, the final steps involve signing the documents and starting the payment process under the new terms.

Hawaii real estate prices are some of the highest in the nation which makes mortgage assumptions especially appealing. However, the process, while straightforward, requires meticulous attention to detail to ensure a win-win for both buyer and seller.

Exploring the benefits of assumable mortgages, especially with VA loan features, can open doors to savvy investments and long-term savings. As we delve deeper into the facets of mortgage assumptions in Hawaii, it becomes clear that understanding and leveraging this option requires research, consultation, and an open mind.

Remember, the journey to unlocking the potential of assumable mortgages in Hawaii is an enlightening one. Whether you're a buyer looking to step into a seller's shoes or a seller aiming to offer a compelling deal, the assumable mortgage could be your ticket to success in Hawaii's vibrant real estate scene.

Requirements to Assume a Hawaii VA Loan