Secondhand vehicles, pre-owned furnishings, and thrifted attire—all can be savvy, budget-friendly buys. But what about mortgages? It may sound unconventional, yet in certain scenarios, a purchaser can assume the seller’s mortgage. Though intricate, it’s essential for both buyers and sellers to understand the workings of an assumable mortgage, its desirability, and who stands to gain the most from it.
An assumable mortgage enables a buyer to take over the seller’s existing mortgage, including its interest rate, repayment period, current principal balance, and other terms, rather than obtaining a new loan.
The primary potential benefit for the buyer lies in the possibility that the terms of the seller’s mortgage may be more favorable compared to the prevailing terms offered on a new mortgage. While the interest rate is crucial, other factors should also be considered.
According to Lemar Wooley, a former spokesperson for the U.S. Department of Housing and Urban Development, assuming a mortgage can generally be a simpler, easier, and less expensive process for the buyer.
When assuming a mortgage, the current borrower transfers the remaining loan balance to you, making you responsible for the subsequent payments. Consequently, the mortgage retains the same terms as those agreed upon by the previous homeowner, encompassing the identical interest rate and monthly payments.
However, you’ll still need to bring some funds to the closing table. In assuming the mortgage, you must compensate the seller for the accrued equity in the home—the portion of the mortgage they’ve already paid off. While this forms part of the overall purchase price, it necessitates immediate payment, essentially serving as your down payment. This sum can be sourced from your own funds or financed through an alternative loan.
For instance, if a homeowner possesses a property valued at $400,000 with an outstanding mortgage balance of $250,000, they effectively own $150,000 worth of equity in the home. To “repay” the seller for their equity stake, you’d be required to provide a cash payment of $150,000.
Assuming a mortgage doesn’t necessarily occur solely through a sale. Inheritance or divorce proceedings can also facilitate the assumption of an existing mortgage. For instance, a family member, or sometimes even non-relatives, can assume a mortgage on a property they’ve inherited. Similarly, if one individual is granted sole ownership of a property in a divorce settlement, they can undertake the full existing mortgage.
In both scenarios, assumption is permissible even in the absence of an assumption clause in the contract or if it’s a conventional loan. In cases of inheritance, the new borrower isn’t required to qualify for the loan in order to assume it, provided they were related to the deceased.
Relevant articles:
– We got a 2.6% mortgage rate this year to buy our first home. Here’s how we did it., Business Insider, Mar 6, 2024
– I got a 2.5% mortgage rate last year when everyone else was getting 6%. It’s saving us $40,000 and helping pay off my medical bills for cancer treatment., Business Insider, Mar 19, 2024
– What Is An Assumable Mortgage?, bankrate.com
– We got a 2.6% mortgage rate this year to buy our first home. Here’s how we did it., Ground News, Mar 6, 2024