A Look At Assumable Mortgages

Any one who has ever taken on the task of purchasing a home is fully aware that it can be a very costly undertaking, and that it usually requires some type of financing or another in order to make the purchase even possible. In almost all cases, anyone who is looking to purchase a house goes to a bank or another type of lending institution and applies for a mortgage for the purchase of the home. One other alternative to this traditional technique that may prove feasible however is an assumable mortgage. With this type of mortgage, the homebuyer is given the legal right to take over or “assume” the existing mortgage of the seller, as long as he or she has the approval of the lender of the mortgage.

 

If it so happens that the interest rates on a particular piece of property has gone up since the time when the original mortgage was taken out by the seller, the buyer then is in a position to benefit the most from the assumable mortgage arrangement. The reason for this is simply that in the event of an increase in interest rates, the costs associated with borrowing also increases. Therefore, if the buyer can take over the seller's relatively low-rate mortgage, he or she can avoid having to pay having to pay the current interest rate, which can be considerably higher. Keep in mind however, that the cost of the home in question may not be covered in full by the assumable mortgage and that the person who assumes the mortgage may have to pay a down payment on the rest of the amount, or he or she will have to apply for additional financing.

 

To explain this more clearly, let us take as an example a seller who only has an assumable mortgage in the amount of $100,000 but is selling his or her property for $150,000. In this particular case, the buyer will then have somehow come up with a way to raise the additional $50,000. Since the buyer will only assume $100,000 dollars out of the total cost of the house, the rest of it will have to be borrowed at the current interest rate, which will of course be higher. In addition, although the mortgage is going to be assumed from the seller, the lender has the option to change the terms of the loan for the buyer, taking into consideration several factors, some of which include the credit risk of the buyer and the current condition of the market.

 

As far as the seller of the property is concerned, there is however a certain degree of risk inherent in this type of mortgage. An assumable mortgage can actually render the seller legally liable for the loan even after the assumption had already taken place. In the event that the buyer defaults on the loan, the seller may have to be responsible for whatever amount the lender is unable to collect from the buyer. In order to avoid this risk, a seller may opt to release their liability upon assumption of the mortgage.

Comments

[Dana Hall]

An assumable mortgage is a great way to go! There are many benefits to the buyer and the seller. To mitigate the risk to the seller, it is important to complete the transaction and get full approval from the mortgage holder. That will provide the seller with complete release of liability.