The Equity Gap Explained: Your Real Down Payment on an Assumable Mortgage

The equity gap is the number one question I get from buyers interested in assumable mortgages. So let me break it down clearly.

The equity gap is the difference between the home's purchase price and the remaining balance on the assumable loan. It's, well, actually it's not really a down payment. It's more like the seller's built-up equity that you need to cover.

Simple Math

Home price: $450,000

Remaining loan balance: $340,000

Equity gap: $110,000

That $110,000 is what you need to bring to the table. The seller walks away with that money (their equity). You take over their loan for $340,000 at their rate.

Now, $110,000 sounds like a lot. But remember: your monthly payment at 2.75% on $340,000 is about $1,556/month. A new mortgage at 7% on the full $450,000 would be about $2,993/month. You're saving $1,437 per month. That $110K equity gap pays for itself in about 6.5 years of savings. After that, it's pure profit.

Your Options for Covering the Gap

You don't need $110K in cash. Here are the realistic options:

Option 1: Cash

If you've got it, great. This is the simplest path. No second mortgage, no additional interest payments. You assume the loan, pay the equity gap in cash, done.

Option 2: Second Mortgage

This is the most common approach for buyers who don't have huge cash reserves. Companies like SpringEQ specialize in second mortgages for assumption transactions.

The math: say you put 5% down on the equity gap ($5,500) and finance the rest ($104,500) as a second mortgage. Even at a higher rate on the second mortgage, your blended payment is still way lower than a traditional mortgage at 7%.

Let's run it:

• First mortgage (assumed): $340,000 at 2.75% = $1,556/month
• Second mortgage: $104,500 at 9% for 15 years = $1,060/month
• Total: $2,616/month

Compare that to a new single mortgage at 7%: $2,993/month. You're still saving $377/month. And the second mortgage gets paid off in 15 years, after which your payment drops to just $1,556.

Option 3: HELOC

If you own another property with equity, you can take a home equity line of credit to cover the gap. Interest-only payments during the draw period keep your costs low.

Option 4: Gift Funds

FHA allows gift funds to cover the equity gap. If you have family willing to help, this is a viable path.

Option 5: Negotiate a Smaller Gap

Sometimes you can negotiate the purchase price down, which shrinks the equity gap. Or find properties where the seller owes more relative to the home value, creating a naturally smaller gap.

What Determines the Size of the Gap?

Three things:

1. How long the seller has owned the home. More years = more payments made = more equity built up = bigger gap. A seller who bought in 2021 has about 4-5 years of payments in. A seller who bought in 2019 has more.

2. Home value appreciation. If the home has gone up in value since the seller bought it, the gap is bigger. Colorado prices have appreciated significantly since 2020, which pushes equity gaps higher.

3. The original down payment. If the seller put 20% down, they started with more equity. VA loans often have 0% down, which means the initial equity was minimal, keeping gaps smaller.

The Sweet Spot

I look for properties where the equity gap is manageable relative to the savings. A $60K gap on a home where you're saving $900/month is a different conversation than a $200K gap with the same savings.

Properties with VA loans (often 0% down originally) and recent purchases (2021-2022) tend to have the smallest equity gaps. FHA loans with 3.5% down from that same period are similar.

The best deals are homes where:

• The seller bought in 2020-2022
• Low or zero down payment loan
• Moderate appreciation (not a hot neighborhood that doubled in value)
• Rate under 3%

Don't Let the Gap Scare You Away

I've had buyers see a $100K equity gap and immediately think it's impossible. Then we run the total cost analysis and they realize they're still coming out way ahead.

The question isn't "can I come up with $100K?" The question is "does the monthly savings justify the cost of covering the gap?" And when you're saving $800-$1,200 per month, the answer is almost always yes.

Second mortgages exist for exactly this reason. You don't need to be a cash buyer. You need a plan for the gap, and there are several good options.