An assumable mortgage can benefit both the seller and the home buyer. Here are some advantages of assumable mortgages.
If you’re in the market for a mortgage, you may have come across lenders that offer assumable mortgages. But, what is an assumable mortgage? How does it work? And should you take out an assumable mortgage? For answers to these questions and more on assumable mortgages, keep reading.
Assumable Mortgage: The Definition
An assumable mortgage is a financial agreement between three parties, a lender, mortgage owner, and a buyer. With assumable mortgages, the mortgage owners agree to transfer their mortgages and outstanding balances to willing buyers. In doing so, the buyer “assumes” the mortgage owner’s mortgage and avoids getting their own mortgage.
How Do Assumable Mortgage Work?
When homebuyers agree to take out a mortgage, they get money from the lender, provided they repay the principal and interest fee. However, homeowners may decide to sell the house in some cases before completing mortgage payments; this is still okay.
If homeowners decide to take this route, they can either take the money from selling the house or complete mortgage payments in monthly installments. Alternatively, they can transfer the outstanding mortgage balance to the homebuyer entirely. This saves the homebuyer the trouble of taking out another mortgage to pay off the house.
The homebuyer assumes all contractual terms of the mortgage, including principal and interest fee payment, repayment period, among other contractual terms. Depending on the mortgage, house buyers might benefit from lower interest rates once they take out an assumable mortgage. However, this may not hold for fixed-interest mortgages.
It’s worth noting that not all mortgages are assumable, and whether a house buyer can approve a mortgage is subject to the lender’s approval. Conventional mortgages are harder to assume, while FHA, VA, and USDA mortgages are assumable.
What Are the Benefits of an Assumable Mortgage?
An assumable mortgage can benefit both the seller and the home buyer. Here are some advantages of assumable mortgages:
- Makes house-selling easier – Assumable mortgages make homes easier to sell, especially if interest rates have increased over the years. For instance, if the seller took out a mortgage with a 3.5% interest rate and the interest rate on the same type of mortgage is now 6.0%. The assumable mortgage will make the house more attractive to buyers.
- Better House-Buying Offers – Home sellers can use assumable mortgages to their advantage when pitching an offer. That way, they can better negotiate leverage for offers for the homes they’re selling.
- Lower interest rates – House buyers can benefit from lower interest rates if they assume a mortgage with a favorable interest rate.
- Reduces closing costs – home buyers will pay lower closing costs because most assumable mortgages limit assumption costs.
Assumable Mortgages Made Easy
The information above is everything you need to know about assumable mortgages. Whether assuming a mortgage is a good idea depends on your specific situation. However, be sure to do your research and seek advice from a mortgage expert before accepting a mortgage to ensure it works for you.
