What is an Assumable Mortgage?
Assumption of a mortgage loan is the transfer from the seller of a property to a buyer, who then takes over the mortgage payments on the seller’s pre-existing loan.
When interest rates are high, loan assumption can provide homebuyers with access to lower interest rates through the seller’s mortgage, the rates of which may have been fixed low. However, as beneficial as this option can be, loan assumption does come at some cost as well.
Most mortgages are un-assumable
Mortgage assumption depends on the type of loan secured by the seller. When discussing a possible home purchase, borrowers should ask about the possibility of mortgage assumption; though, since the majority of mortgages cannot be assumed due to individual program regulations, most borrowers will not have the option.
Borrowers pay the difference
Although the seller has paid into the mortgage, the buyer will still be responsible for paying the full home value. So if a seller still owes $80K on a home and is asking for $110K, buyers will be held responsible for paying the remaining $30K. In order to pay, home buyers without a large amount of cash can opt to secure a new mortgage loan, although the rates for the second mortgage loan will often be much higher.
Not all mortgage assumptions are beneficial
A mortgage assumption presents many rate advantages over a new loan, but not all loan assumption transactions benefit the buyer. Borrowers should only assume a loan if unable to secure better rates and terms through a standard loan program, and if they have cash reserves. With current interest rates remaining low, mortgage assumption may not be the best option, and most sellers with higher rates have already refinanced to reduce their mortgage interest