Unless you are building a new house, when you buy you likely are taking over living in what used to be someone else’s home. If a mortgage is assumable it allows you to take over the responsibility of what used to be someone else’s mortgage. It creates a packaged deal– the house and the loan can be passed onto the buyer, given that the seller’s mortgage is assumable. With an assumable mortgage, the interest rate and term will stay the same. For example, a 30- year mortgage that is seven years old would become a 23-year mortgage with a 2.75% interest rate for the buyer.
You might be thinking to yourself, “cool, but how does that apply and why should it matter?” Well given the interest rate scenario in which we find ourselves– they are historically low, if you haven’t heard– so having an assumable mortgage could benefit you down the road. You see, if interest rates increase when you list your home to sell then you now have an incredible advantage over other homes on the market. You can offer a lower interest rate which could spell significant savings depending on their increase. Additionally, it costs a lot less for a lender when a mortgage is assumable verses creating a whole new mortgage resulting in reduced closing costs for the buyer.
So is there a downside? Well despite lower closing costs there could be a large down payment involved. If the home’s value has increased and the your mortgage no longer covers the value of the home the buyer would need to make up for the difference. Let’s look at an example:
Damien, after paying his mortgage for seven years, owes $120,000 on it. Morgan, the buyer, would assume the $120,000 loan. However, the home’s value has risen to $190,000 in the seven years Damien has owned the house. Morgan will be required to pay the difference. Morgan can do this with a down payment of $70,000 or would need to obtain a second mortgage to cover the difference. If she goes the route of getting a second mortgage, Morgan would now be responsible for those closing costs and in most cases, will be at a higher interest rate.
This can make it difficult for some buyers to assume an existing mortgage. Also, not all mortgages are assumable, just those that are insured by the government. Meaning, FHA, VA or USDA/RHS loans are assumable but conventional loans are not. Ultimately, the approval to assume a mortgage will fall on the shoulders of a lender and buyer will still need to go through the process of being qualified, just as they would if they were obtaining a new mortgage, to ensure the buyer can pay the loan.
If you are looking for more information on assumable mortgages and would like to find out if you have a mortgage that can be assumed, contact a mortgage banker in your area. We will be glad to guide you!
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