Definition of "Assumable Mortgage"
The definition of an assumable mortgage is what happens when a buyer assumes or takes over a mortgage that the seller contracted. This is a type of financial arrangement that passes an outstanding mortgage on to the buyer of the property. An assumable mortgage is commonly used when the original buyer of the house and borrower of the mortgage sells the property before they finalized the payments for the mortgage. Through an assumable mortgage, the buyer can avoid taking out a loan themselves to purchase the house.
How does an assumable mortgage work?
As mentioned above, homeowners usually take out a mortgage to purchase a property. In the contract for the mortgage, interest rates are stipulated in the repayment plans. The financial institution that gives the mortgage calculates these interest rates in the monthly payments that also cover the principal repayment of the loan. People usually inquire about interest rates at financial institutions, and that can be why people choose one bank over the other.
If a homeowner took out a mortgage to purchase a house, then decides to sell before the 30 years of the mortgage are up, what do they do with their mortgage? This is when the mortgage can become assumable, which means that the buyer assumes it, and the mortgage is transferred.
Now, assuming an outstanding mortgage for the buyer makes the assumable mortgage theirs. The assumable mortgage comes with the principal balance, the interest rate, whatever repayment plan it had when the seller made it, and other contractual obligations that the seller had. This can simplify the process for the buyer who can avoid the screening process of taking out a new mortgage by taking over the assumable mortgage. The interest rate can also create an incentive if a new mortgage would come with a higher interest rate.
Pros and Cons of an Assumable Mortgage
The most important thing on an assumable mortgage is the amount of balance left from the mortgage. If the buyer purchased the property for $300,000 and the seller’s assumable mortgage has a balance of $130,000, the new buyer will have to make a downpayment of $170,000. This might require the new buyer to take out another loan to cover the down payment, which is not the best option.
If, at the time the seller took out the mortgage, the interest rate was at 3.3% and would now be at 6%, the new buyer could be motivated to assume the mortgage.
The most significant advantage is if the assumable mortgage’s balance is higher than the down payment. The worst-case scenario will be if the buyer takes out a loan to purchase the house and the assumable mortgage as well. If, however, the seller’s assumable mortgage has a balance of $240,000, then the buyer needs to make a down payment of $60,000 without needing to take out another loan.
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