A Phoenix man got a $2.375% mortgage rate this year. He broke down how.

• Terry Day, a realtor from Phoenix, used an assumable mortgage to purchase a home in October.
• He said the financing option is saving him $1,000 on his mortgage each month.
• Challenges can arise when originating these types of loans; many lenders are unfamiliar with them.

In today's high-interest rate environment, housing affordability has fallen to an all-time low — but some homebuyers have been able to save hundreds of dollars on their monthly mortgage payments.

Even before mortgage rates began their winter descent, some were using assumable mortgages to make their dream of buying a house a reality. The lesser-known housing finance option allows certain eligible buyers to take over a home seller's existing mortgage, and the prior owner's low rate.

Mortgage rates have been rising since November 2021 — reaching almost 8% this fall — causing some buyers to postpone home purchases, while others have been priced out. It's led to a renewed interest in assumable mortgages.

Take Terry Day, a real-estate agent from the Phoenix area, who used an assumable mortgage to secure a lower interest rate on his home.

In October, he and his wife bought a 2,232-square-foot home in Goodyear, Arizona, for $385,000 with a 2.375% interest rate. During that month, conventional mortgage rates exceeded 7%.

To understand how much of a difference low mortgage rates can make, look at the Days' monthly payment. It's $1,962 a month — well below the average US monthly payment of $2,823 on a 30-year fixed mortgage or $3,724 on a 15-year fixed mortgage.

"We're saving about $1,000 a month on our payments," Day told Business Insider. "It was just a really easy transaction to make."

The challenges with assumable mortgages

Though Day's home purchase was successful, he said taking on an assumable mortgage came with challenges.

For one, he had to settle the seller's mortgage balance and closing costs, totaling $30,000. However, as the realtor in the home sale, he waived his $25,000 commission, reducing the overall expense to $5,000.

He also found the lending process to be confusing. Many lenders are not very experienced or educated in processing assumable mortgages, he said, explaining that it led to hiccups during his own transaction.

"The lender was at times less than easy to work with mostly because they would ask for underwriting items that they did not need," he said. "I am lucky to be as experienced in real estate as I am and started working on these odd requests early. I also reached out to my contacts in the lending industry to better understand how to properly respond and to move the process forward."

Day discovered that the paperwork required for an assumable mortgage — which is usually processed through the seller's existing lender — is similar to that of a traditional mortgage.

"They want to see your income, bank statements, what you're paying out for credit cards, car payments, and all the other bills you have," he said.

To qualify for an assumable mortgage, a buyer will also need to: Live in the home as their primary residence, have a credit score above 580, maintain a debt-to-income-ratio below 50%, and possess the ability to fund the down payment either in cash or with the support of a second loan at current interest rates.

Having experienced the loan assumption process firsthand, Day now teaches each of his clients about assumable mortgages and the requirements for obtaining one.

"I educate them on the possibility of saving a tremendous amount of money on a monthly basis with an assumable purchase," he said. "I call it the 'mortgage cheat code.'"