What is an Assumable Mortgage?
An assumable mortgage is a loan that can be taken over or “assumed” by another buyer. Financially speaking, it’s an arrangement in which an outstanding mortgage and its terms can be transferred from the current owner to a buyer. By assuming the previous owner’s remaining debt, the buyer can avoid having to obtain his or her own mortgage. To put it another way, it’s buying a used mortgage.
Is an Assumable Mortgage a sound financial decision?
Many buyers are unable to cover the entire cost of a home. Therefore, buyers take out a mortgage from a lender to finance the remaining portion after an initial down-payment.
Assumable mortgages are limited to either FHA or VA loans. Conventional loans are not included. An FHA Loan allows down payments as low as 3.5%. VA loans have no mandated down payment.
Along with the down payment comes many other potential hurdles homebuyers have to clear. It could make perfect sense to buy or “assume” the loan of a seller who has already navigated the process. In that case, the new buyer would be taking on the seller’s repayment schedule, principal balance, and interest rate.
Assumable mortgages can especially make sense in a market where interest rates are on the rise or have remained higher than average. Higher costs to borrow accompany these higher rates as well. It could very well be an attractive option to purchase a home with a fixed, lower interest rate.
What Costs are Involved?
When a new buyer assumes a mortgage, all benefits are applied to the remaining balance or equity from the original mortgage. For example, if the remaining balance is much less than the current value of the home, the new homeowner will have to come up with a down payment for the remainder. This is often done by taking a second mortgage.
The new mortgage will then be subject to new terms, potentially including higher interest rates depending updated market factors and borrowers’ credit history.
Finally, the original lender must approve of any assumption that takes place. Meaning the new borrower must still apply and meet the requirements to the original lender’s satisfaction.