Definition of "Assumable Mortgage"

Betty Thompson real estate agent

Written by

Betty Thompsonelite badge icon

Coldwell Banker Advantage

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.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Mortgage Terms

A documentation requirement where the applicant's income is not disclosed. ...

A mortgage on which interest is calculated daily based on the balance on the day of payment, rather than monthly, as on the standard mortgage. ...

A borrower with the best credit rating, deserving of the lowest prices that lenders offer. ...

The monthly mortgage payment which, if maintained unchanged through the remaining life of the loan at the then-existing interest rate, will pay off the loan at term. ...

The method of financing used when a borrower contracts to have a house built, as opposed to purchasing a completed house. Construction can be financed in two ways. One way is to use two ...

The minimum allowable ratio of down payment to sale price on any loan program. If the minimum is 10%, for example, it means that you must make a down payment of at least $10,000 on a ...

Fees collected by a loan officer from a borrower that are lower than the target fees specified by the lender or mortgage broker who employs the loan officer. An underage is the opposite ...

Loan applications that are withdrawn by borrowers, because they have found a better deal or for other reasons. ...

A contribution to a borrower's down payment or settlement costs made by a home seller, as an alternative to a price reduction. ...

Popular Mortgage Questions