Now that interest rates are predicted to rise, an increasing number of people are talking again about assumable mortgages, also called a mortgage assumption. With an assumable mortgage, the home buyer can take over, or assume, the obligations of the existing mortgage of the seller – but only with the approval of the original mortgage lender.
How assumable mortgages work
This type of mortgage is a financing agreement where the seller transfers over their mortgage terms, interest rate, and remaining balance to the buyer. This way, the buyer can avoid having to negotiate their own new mortgage, which would likely have a higher interest rate.
Many people aren’t familiar with this type of arrangement as it’s not very commonly used utilized, and it’s often not encouraged by lenders. Many years ago, when interest rates were in the double-digits, there was no formal approval process for assumable mortgages; it was simply arranged that the seller was financially responsible if the buyer failed to make payments. With stricter approval processes and interest rates as low (and competitive) as they have been the past few years, there was less interest in assumable mortgages.
What are the pros and cons of assumable mortgages?
Any seller and potential buyer can request an assumable mortgage arrangement, but the lender who administered the original mortgage must first approve. The buyer will face many of the same requirements to qualify as they would for a new mortgage, such as income verification and having a solid credit score. In fact, it’s a detailed calculation that your broker or lender can review with you to ensure you are indeed getting a better deal after factoring in all other financial costs and considerations.
In addition to the lower interest rate, potential buyers benefit by saving on some of the closing costs and appraisal fees. However, there are additional fees involved in assuming a mortgage. For example, because the buyer has a shorter amortization period than the original mortgage holders, there could be higher monthly payments to pay off the mortgage balance. Additionally, mortgage insurance premiums may be added, and many lenders charge a fee for drafting up the mortgage assumption documents.
For the sellers, if they are having difficulty selling their home or are looking for a fast sale, offering an assumed mortgage can entice eligible buyers, mostly due to the lower interest rate involved. Occasionally sellers find themselves in a situation they didn’t expect when they signed on to their mortgage, such as a divorce, job loss, or a sudden move. Getting out of a mortgage in those cases can involve hefty penalties, so offering an assumed mortgage gets them out of a bind. It can also allow the seller to raise the asking price of the property, therefore making a higher profit when receiving the difference between the cost and the remaining balance from the buyer. This is comparable to the down payment that the buyer would be paying on any other home purchase. The biggest downside of assumable mortgages for sellers is the risk involved if the buyer defaults on the payments. In many cases, even with insurance in place, the seller can be on the hook to pay the remaining balance of a home they don’t own anymore.
Moving towards a mortgage that suits you best
Even though you may be interested, you can’t assume that an assumable mortgage is for you. They aren’t ideal for everyone, and, with the new tighter mortgage qualifying rules for 2018, it’s not clear if future approvals for these types of mortgages will be impacted. The best advice for anyone who is looking to purchase a home…is to get good advice. Knowing what’s available for you, as well as your rights and responsibilities, is key to having the entire process run smoothly – but more importantly – helping ensure you get the home you want! It’s my job as an experienced mortgage broker to advise each client about what is most beneficial and feasible for you & your family. Call me today at 705-315-0516 to learn more about your mortgage options.