Mortgage rates that are high, or higher than they have been in recent memory, can be a real blocker for buyers and sellers. It may feel psychologically challenging to buy at a steeper rate than you would have gotten just a few years ago. And for sellers looking to exit one house for another, the same conundrum can apply.
But what if instead of getting a new mortgage, you could simply take over the current homeowner’s existing lower-rate loan? Though not common, this is possible through what is known as an assumable mortgage.
What is an assumable mortgage?
A type of home loan that “transfers the responsibility for the mortgage to a new person without changing the mortgage's terms,” said Experian. This means the seller takes on responsibility for repaying the loan’s remaining balance according to the previously agreed-upon repayment timeline and terms, notably including the existing mortgage rate.
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Usually, when someone buys a house, they will apply for and take out a mortgage of their own, with the seller using the proceeds from the sale of the house to pay off the remaining balance on their mortgage. But with an assumable mortgage, “rather than starting over with a new 30-year mortgage at current market rates, the buyer essentially steps into the seller’s loan,” said Kiplinger.
What are the benefits of assuming a mortgage?
The most apparent benefit is the potential to get a loan at a lower rate. “If the seller purchased the home when rates were lower, you can get a better rate on an assumable loan than you’d be able to get on a new one,” said Bankrate. Plus, “when you assume a mortgage, you avoid some usual mortgage closing costs, including an origination fee.” Buyers will also have a shorter loan term, which can lead to savings over time.
On the seller’s side of things, if they have “an assumable mortgage with a relatively low rate, they may be able to draw more interested buyers and a higher sale price,” said Bankrate.
Are there any drawbacks to assumable mortgages?
Perhaps the most obvious caveat is that these mortgages are not very easy to come by. “Only about 6% of listings are eligible, and in most circumstances must either be an FHA, USDA or VA loan,” said Realtor.com. Conventional mortgages, the most common type of mortgage, are generally non-assumable. Further, “unless you’re inheriting an assumable mortgage, you’ll still need to qualify for the loan you want to assume,” said Bankrate.
Even if your loan is eligible and you do qualify, the option is not always worthwhile. For example, it is possible the “loan you’re taking on may not be large enough to cover the home’s current market value, which could leave you responsible for paying the difference,” said U.S. Bank. Alternatively, maybe the seller has built up significant equity in the home, in which case you will need to make a large payment upfront.
There can be downsides for sellers, too. Namely, the seller may “remain legally responsible for the mortgage even after the sale, unless the lender specifically releases them from the obligation,” said U.S. Bank.
