An assumable mortgage is a type of home financing arrangement where the terms of an outstanding mortgage are transferred from the current owner to the buyer. By taking over the previous homeowner’s (the seller’s) debt, the buyer avoids obtaining their own mortgage. With rising interest rates, an assumable mortgage is often attractive to a buyer, allowing them to take on an existing loan at a lower rate. This means that the buyer can avoid the process of obtaining a new loan from a bank.
It’s important to note, though, that a buyer still must qualify to take over the assumable mortgage.
Different types of loans may qualify as an assumable mortgage, but there are considerations to keep in mind. For instance, U.S. Department of Agriculture (USDA), Federal Housing Authority (FHA), and Veteran Affairs (VA) loans are assumable when certain criteria are met. Contrary to popular belief, you do not have to be a member of the military to assume a VA loan.
So why would a consumer want an assumable mortgage? Well, if the current interest rate is higher than the interest rate on the assumable mortgage, it may save them money in the long run, especially if the assumable mortgage has a fixed interest rate.
We recently chatted with Michael Dean from CrossCountry Mortgage to help us better understand the pros and cons of an assumable mortgage.
He only shared one benefit: Your original interest rate remains. In other words, you get to keep the lower interest rate on the mortgage being assumed.
Here are eight cons to keep in mind:
1. Only government loans (FHA, VA, or USDA) are assumable.
2. The loan amount stays the same.
This is the primary reason an assumable mortgage doesn’t typically pan out. For instance, if a seller obtained a mortgage five years ago, has a remaining loan balance of $300,000.00, and is selling their house for $500,000.00, the assumable mortgage will leave the new buyer with needing to bring in $200,000.00 out of pocket.
3. The same term remains.
You cannot re-amortize a 10-year-old loan to make it a 30-year loan again. Instead, payments will resume as they always were with 20 years of payments remaining.
4. FHA mortgage insurance stays on the loan, regardless of how much down payment you bring to the table.
5. You still need to qualify for the mortgage that you’re assuming.
It’s like you’re applying for a mortgage through a customer service department.
6. Closing on an assumable mortgage can take up to 90 days.
The current lender is getting paid whether your assumption goes through or not – because when the home sells, their mortgage is paid off. And if the rate is lower, they can lend someone else that same money using today’s prevailing rates. So they have no financial incentive to move quickly or approve the assumption at all.
7. Most sellers don’t realize the process of having someone assume their loan.
When they realize that the closings can take a while, they quickly look for other offers with traditional financing that can close in three to four weeks.
8. If a VA loan is being assumed, the current seller’s VA entitlement remains wrapped up in the home.
It can impact them financially in the future if the new buyer defaults on their loan.
Although an assumable mortgage seems attractive to buyers when mortgage rates are high, the risks often outweigh the benefits.
Seek advice from your real estate agent and mortgage lender to ensure that you’re making the best decision for your homeownership!
Let The Urban Dog Group help you with your real estate needs. Contact Christine Elias at caerealestate@gmail.com.
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