Understanding an Assumable Home Mortgage

Introduction

As if interest rates, amortization tables, government programs, buydowns, and points aren’t enough to consider, when you are applying for a mortgage you also need to consider the assumable loan. There are both advantages and disadvantages to assuming an existing loan or allowing someone to do so when you sell a home. First you need to understand the process of assuming a loan.

How Mortgage Assumption Works

A buyer who assumes a mortgage takes on responsibility for paying the seller’s mortgage as it stands at that time. Buyers must “assume” all responsibilities set forth in those mortgages as if they were new ones made to them and the original buyer had nothing to do with it. An advantage to this is that the buyer will get the lower interest rate the original buyer had at the origination of the loan. It stands to reason that assumable loans increase in popularity when interest rates rise.

What the Buyer Will Want

Remember that the buyer will have to pay the seller for the difference of the sale price minus the remaining loan amount, which can be substantial. Otherwise, the buyer will have to come up with a second mortgage, and this will probably defeat much of the purpose of assuming a mortgage. This will not be the original price of the house minus the remaining loan—sellers recognize the advantage they have in offering an assumable mortgage and the price of the house often bears this out.

Make Sure Your Loan is Assumable

Because the lender suffers for this type of loan, often they don’t allow a loan to be assumable. When you sign loan documents on an original mortgage, make sure you know if your loan is assumable for future buyers of your property. Lenders today may also allow an assumption with a raise to the going market rates.

Wrap Mortgage

Often sellers will attempt to get around a non-assumable loan with a “wrap” mortgage. The wrap-around is where a buyer gives a mortgage directly to the seller, usually at a higher interest rate or involving another form of fee. The seller makes payments on his own mortgage while collecting on the new one from her buyer. This is a poor choice for both buyer and seller. If the buyer defaults, the seller must still pay his own mortgage. If lenders finds out about loan agreements between the sellers and buyers, they can call the loan due in full on the original loan, leaving both seller and buyer in a pickle.