Cynthia Sullivan and her husband Collins bought a house in the Fort Lincoln new town in Northeast Washington recently for $75,000 and few of the hassles of the 17-percent interest rates that were current at the time.
They put $8,000 down and assumed a $67,500 Veterans Administration mortgage from the previous owners. As a result, the couple's monthly house note is $592 -- $417 a month (or $5,004 a year) cheaper than it would have been with a $67,500 mortgage at 17 percent.
The Sullivans had not intended to buy a house with an assumable mortgage when they set out house hunting, but now they are glad they did. "The payments are much lower and it will be easier for us to sell," she said, because the mortgage and its 10 percent interest rate can be passed along to still other buyers.
Homes like the Sullivans' -- those with federally guaranteed mortgages carrying interest rates that are half as much as current ones and can be passed on to cash-pinched buyers -- are keeping the real estate industry afloat these days.
They also are reviving the popularity of some Alexandria and District of Columbia neighborhoods and attracting home-buying investors, accustomed to the fancier neighborhoods, to less affluent but potentially lucrative areas near planned Metro stops.
Five years ago, an estimated 10 to 15 percent of the 3 million homes sold nationally were financed through assumption of existing loans. Now the portion has ballooned to 75 percent, although the actual number of sales has declined to 2.5 million. Although no precise figures are available for the metropolitan area, industry spokesman here say that trend is mirrored in the Washington housing market.
"Everything that has a FHA or VA loan is a hot commodity. There are no ifs, ands or buts about it," said William Ellis, the vice president of residential sales at the Shannon and Luchs realty firm.
Ellis said that last month 51 of the 147 homes his company sold in the District and Montgomery and Prince George's counties were financed through assumptions.
At a time when homes sales are languishing because of today's record-high interest rates, the beauty of an existing VA or FHA (Federal Housing Administration) loan is that a seller can pass it on to a new buyer and the interest rate remains the same, usually between 8 to 10 percent.
The owner then usually gives the buyer a three-to-five-year second mortgage for the difference between the existing mortgage and the sales price, minus the down payment.
When a home with a conventional mortgage is sold, banks and savings and loans require that the old mortgage be repaid and that the buyer obtain new financing at today's interest rates, which now average 18.6 percent.
Moreover, few financial institutions are lending mortgage money in the traditional way any more -- at a fixed interest rate for 30 years.
As interest rates began to creep upward after October 1979, so did the popularity of assumable loans. In early 1980, 25 percent of the 3 million homes sold across the country involved some type of creative financing, most often involving an assumable mortgage, according to Ken Kerin, head of research for the National Association of Realtors.
Last spring, another survey showed that 50 percent of the home sales were financed through assumptions and owners lending buyers mortgage money, a figure that now has risen to 75 percent, Kerin said.
"Five years ago we didn't even ask about creative financing or assumptions because they were not an integral part of the market. Now they are the market," said Kerin.
Rita Reynolds, an agent with CBS Realty, said simply, "They're what's keeping us alive."
Since the early 1970s, FHA has been the lender of last resort, financing lower-priced homes in working-class neighborhoods for families who had little money for a down payment, Kerin explained. The government guarantees these mortgages and promises to pay the financial institution that made the loan if a buyer defaults.
Middle-class home buyers often frowned on FHA mortgages because they required a lot of paperwork and usually took 60 days to process. A savings and loan company would process a mortgage more quickly, according to several real estate agents.
Now, however, working-class neighborhoods with a large number of homes with assumable mortgages are increasingly attractive to middle-class professional couples looking for their first home.
"People shied away from such neighborhoods as Warwick Village in Alexandria and Fairhaven and Sequoya in Fairfax County because they could get larger and newer homes, but they are now buying there because they can get the financing" and these communities are located near subway stations, said Gayl Warman, head of the Long and Foster realty office in Alexandria.
Norris Dodson, of the John R. Pinkett Inc. realty firm, said he sees the same phenomenon occurring in the Northeast Washington neighborhoods of Petworth, Riggs Park and Brookland.
"People are going where they can get good financing," he said. "Shrewd sellers realize that they are selling more than real estate, but also a low-interest, long-term mortgage so they can ask a higher price."
"You can get 10 percent less for your house without an assumable," Warman said. Buyers are willing to pay more for the house in order to get an assumable loan because "people recognize their value. Since long-term fixed-rate mortgages are no longer available and most people can't qualify for the loans at the higher rates, they go for the assumptions," she said.
"An assumable mortgage can make the difference between a house selling and just sitting on the market," said David Spires, manager of the Shannon and Luchs Alexandria office.
He said his company sold a house in Warwick Village within three weeks in August because it had a $52,000 FHA assumable mortgage. The house sold for $81,000 and the new buyers put down $8,000 and went to a savings and loan for the additional $21,000.
Because the house had an assumable loan, the couple buying the house was able to obtain what is known as a "wraparound" combination loan for the entire $73,000 at 12.25 percent, making their monthly payments $760. A conventional loan at the 18 percent rate in effect in August would have cost them $1,116 a month, Spires said.
Real estate investors and agents also have recognized the benefits of buying homes with assumable mortgages and there is some indication that not all of the homes are being bought by people who intend to live in them. Homes located in neighborhoods close to future subway stations are especially attractive to investors and speculators. Georgetown real estate agent Vicki Bagley said she bought three homes with assumable mortgages in the Del Ray section of Alexandria.
"You are guaranteed financing at a lower rate," Bagley said. "It's the only possible way to buy."
Warman said she and other agents in her Long and Foster office have also bought homes with assumable mortgages as investments. "If it doesn't have an assumable we don't want it," she said.
Administrators of the FHA and VA mortgage programs say they have no complaints about the growing popularity of their assumable loans.
"The assumability feature is one of the benefits of the VA guarantee and makes it easier for the veterans selling their houses," said Robert M. O'Toole, deputy director of the VA loan program. Nonveterans may buy the homes, however, and in turn sell the homes to other nonveterans.
Pete Bowers, who administers the FHA program, described the assumability feature as "a distinct consumer advantage."
Financial institutions, of course, take another view.
Alan Wade, of the U.S. Savings and Loan League, said that some financial institutions were losing money because they are required to pay high interest rates on certificates of deposit at the same time that they are holding onto some long-term mortgages with low interest rates.
"We want every mortgage to be due on sale coast to coast," Wade said.