Find An Agent

The Pros and Cons of Assumable Mortgages for Home Buyers

An assumable mortgage is a housing loan that carries over from the current owner to a new owner. This might be a very attractive option for a buyer in a market full of rising interest rates, but there's a possibility that: 1) the mortgage contract specifically disallows assumption and 2) the two mortgage providers won't get along.

An assumable mortgage is a housing loan that carries over from the current owner to a new owner. This might be a very attractive option for a buyer in a market full of rising interest rates, but there's a possibility that: 1) the mortgage contract specifically disallows assumption and 2) the two mortgage providers won't get along.

An assumable mortgage is a housing loan that carries over from the current owner to a new buyer.

Put simply: houses are expensive. In order to purchase a house, 99% of people are going to need to provide an initial amount of money down -- a downpayment -- and then borrow the rest from the bank. This is called taking out a mortgage.

For example, if you're looking to buy a single-story house in your area for $150k, in order to qualify for a good loan (a 30-year fixed rate mortgage), you'll probably need to offer 10% as a down payment ($15k) and have a good credit score (something in the 660-800 range).

In return for lending you the money, the bank sets up a monthly payment schedule that consists of both the principal (the money that you borrowed from the bank) and interest (an additional payment in return for allowing you to borrow the money).

But What Happens if You Want to Sell Your House After Taking on a Mortgage?

For both buyers and sellers, this is where "assuming a mortgage" comes into play.

Imagine, seven years after taking out your $135k mortgage on your home, you decided you wanted to move out of the area. At this point, after making monthly payments for the past five years, your mortgage is down to $90k. One way of getting out of the rest of your loan is to sell it to someone else. The buyer then "assumes," or takes on, your debt.

What Are the Advantages of Assuming a Mortgage?

Good question: Why would someone want to take on your debt? And why might it be a selling point when you come to listing your home?

Well, the answer is pretty simple. In most cases, a buyer wants to take on your mortgage because your interest rate is lower than anything they could get by refinancing.

If you have a 30 year fixed-rate loan with an interest rate of only 3.3%, that's a great deal for someone who, for whatever reason, can't qualify for a loan with an interest rate that's just as low.

Let's continue with our example and add in a buyer: Janice. You closed on your home in 2012, when the average mortgage rate was around 3.6%. Since you have a good credit score, you were able to qualify for a fantastic interest rate of only 3.3%.

When Janice hears that she could possibly assume your mortgage, she's ecstatic! The average mortgage rate in 2018 was 4.5%. That means that by assuming the rest of your debt, she could possibly save thousands of dollars over the course of the loan.

But wait: If Janice takes on the rest of your $95k mortgage and the house is worth at least $150k, how can she do that? Where does the other $65k come from?

What Are the Disadvantages of Assuming a Mortgage?

If Janice assumes your $95k mortgage, she either has to make a down payment of $65k or take out a second mortgage. This is one of the biggest disadvantages to assuming a mortgage.

Not a lot of people have $65k lying around. That might not even be an option for 99% of people.

When it comes to taking out a second mortgage, there are at least a couple problems.

First, the seller's mortgage might include a contractual stipulation that doesn't allow the buyer to take on a second mortgage.

Second, the two mortgage providers might not want to work together. The savings might not be worth the headache.

How Do You Know if Someone Can Assume Your Mortgage?

Do you still feel like you don’t know a whole lot about real estate financing? If you’re thinking about buying or selling a home but you’re not quite sure how to get started, you should talk to a licensed real estate agent.

Through negotiation and finding better deals, the right agent can save you tons of cash. And you know that stressful, antsy feeling you get when you think about buying a home? They’ll help get rid of that.

In fact, you can save even more money by utilizing discounts like home buyer rebate programs. As long as you live in a participating state, you’re liable to receive money back when you purchase a home.

SHARE

Luke Babich

Luke Babich is the co-founder and Chief Strategy Officer of Clever Real Estate, the free online service that connects you with top agents to save money on commission. He's an active real estate investor and licensed agent in St. Louis, with 22 units currently. Luke graduated from Stanford University and subsequently ran a historic data-driven campaign for University City City Council. Luke's writing has been featured in Homeland Security Today, Mashvisor, Payments Journal, and Bigger Pockets.

See all Luke's Posts
WHAT'S NEXT

Find Your Dream Home With A Top Agent And Save Thousands

Learn how you could save thousands when you buy a home with Clever!