A term you might have heard when financing the purchase of a new home is “mortgage assumption”. The concept behind assuming a mortgage is decades old but offers a list of pro and cons for both the buyer and the seller.
What is Mortgage Assumption?
Assuming a mortgage is basically a financing agreement in which a seller transfers the terms, interest rate and remaining mortgage balance to a buyer. By assuming the previous owner’s mortgage, the buyer can avoid having to obtain their own new loan.
Generally, this type of financing was more commonly seen when interest rates were in the double-digits. Nowadays, with record lows on interest rates, it is not a common form of financial agreement. In the 1970s through the 1980s, interest rates skyrocketed, however, mortgage assumptions required no financial approval, but left the seller responsible if the buyer failed to make the payments. In today’s economy, interest rates sit around 2.5% – 3.7%, and approval is equal to that of a new mortgage loan, making the popularity in assuming a mortgage drop drastically.
Who Can Apply To Assume A Mortgage?
Typically any potential buyer can aim to assume a mortgage. The financial institution administering the transfer will decide if the buyer qualifies after exploring their income & credit, as with any mortgage.
It is generally agreed upon that financial institutions are more forgiving when allowing a mortgage assumption than when approving a new mortgage loan.
How Does Assuming a Mortgage Affect The Buyer?
The biggest pro for a potential buyer with an assumed mortgage is the lower interest rate. If the original mortgage terms had lower interest rates than the market’s current rate, the buyer is avoiding the increase. Therefore, assumed mortgages are more commonly seen when the interest rates in the real estate market spike. Another pro for a buyer is saving on the closing costs of the house & the fee for opening a new loan from a financial institution. This fee is often waived when a mortgage is assumed.
On the other end of the spectrum, assuming a mortgage can have its downside for the buyer. Two of the biggest cons are the term length and the insurance premium. Generally, when a mortgage is assumed from a seller, the clock on the original mortgage doesn’t restart. For example, if the original mortgage is for 30 years, and the seller is 20 years into it, that only allows for the buyer to have 10 years to repay the remaining balance. On top of their new mortgage costs, additional fees of mortgage insurance premiums can be added for a minimum of 5 years.
How Does Assuming a Mortgage Affect The Seller?
If a seller is having difficulty selling their home or is looking for a fast sale, offering an assumed mortgage can help, as it can be an enticing factor for eligible buyers. Offering the assumed mortgage option 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 the equivalent of a down payment that a buyer would be paying on a new mortgage.
While a quick sale and raised selling cost can be beneficial, a buyer can also lose out big. In transferring a mortgage over, the original owner would lose out on all the accumulated equity acquired by paying into the house in the previous years.
Financing a mortgage and finding the perfect plan to meet your needs can be a difficult decision. I am here to advise what is most beneficial and feasible for you & your family whenever you are ready to take a look at the finer details. Give me a call at 705-315-0516 to learn more about which financing arrangement works best, to get you into your dream home faster.