The options when securing a mortgage to fund the purchase of your dream home can seem endless when weighing the pros and cons of each. When doing so, be sure to ask your mortgage lender any questions that pop into your head, so that you have a full understanding of what you’re signing on for. Your mortgage is, after all, one of the largest financial investments you will ever make.
An option that isn’t always discussed is that of the “assumable mortgage”. It might sound outlandish but assuming the mortgage of the current home owner is possible for some buyers. With an assumable mortgage, the current mortgage on the home you are buying is simply transferred into the buyers name, therefore, “assuming” the previous owners debt. Although it sounds simple, it can be a very complicated process, which is why we’ve outlined a few items of note below.
When pondering the idea of an assumable mortgage, you’ll want to keep in mind the overall purchase price of the home. Just because the current mortgage is only $220,000 doesn’t mean you won’t need to pay the seller the remaining equity. For example if the current homeowner has an existing mortgage in the amount of $220,000 and you’ve negotiated the purchase price to be $320,000 – If you were to assume the current mortgage in the amount of $220,000 you would also need to have $100,000 in a down payment up front, to pay out the current homeowner to purchase the home. If the buyer doesn’t have deep enough pockets for the upfront investment needed, they wouldn’t have the option of assuming the mortgage, and would need to take out a new mortgage instead.
With a hot real estate market and rising interest rates, an assumable mortgage can be an enticing option. Reason being is that when you assume the current mortgage you also benefit from the lower interest rates that the mortgage was originally locked in for. In comparison if you were to take out a new mortgage you wouldn’t have the alternative to paying anything other than the current market rates in regards to interest. Like applying for a new mortgage, you also have to apply for an assumable mortgage from the current lender regardless of the agreement you have worked out with the seller. The bank will need to make sure they are making a good investment in you as the new homeowner, to ensure that you will be able to make the mortgage payments needed to repay the loan.
When contemplating your mortgage options to fund your new home, it’s always a good idea to seek the advice of a professional mortgage broker. In a matter of minutes, I can help you take a deeper look at your current financial standing and help you decide which mortgage is right for you today and in the future.