What Is an Assumable Mortgage and Is It Right for You?

In today's economy, some homeowners may decide to sell their homes. As a result, they may find themselves upside down or underwater on their mortgage and owe more than their property is currently worth.  

Owing too much on your home can be detrimental to your long-term financial goals. In this case, you may have considered finding a way out of the debt. An assumable mortgage is one option that allows the buyer to step in and take over your payments, thus alleviating you from the debt load quickly and without damaging your credit.

On the other hand, sometimes, this type of mortgage may not be the best choice for everyone. You may not want to assume a mortgage if certain conditions exist, which makes understanding the basics of this type of agreement crucial.

Read on to learn more about assumable mortgages and gauging if it is an option for your home.
 

The Basics of an Assumable Mortgage

An assumable mortgage is a financial agreement between a seller and buyer where the new buyer assumes the seller's contractual agreement with the lending institution. 

When the buyer takes over the mortgage, they begin payment right where the seller has left off. In other words, if the seller had stopped on their 40th payment, the new buyer would pick up on the 41st payment.

How This Mortgage Agreement Works

When someone wants to leave a mortgage, they can check to ensure it's assumable. The bank will transfer the terms to the new person or homebuyer if it is. 

The buyer begins making the payment, alleviating the mortgage payment for the other person. However, the monthly amount, interest rate, and other terms remain the same.

One important issue to keep in mind when working with an assumable mortgage (whether you're on the assuming or the selling end) is that the buyer is taking the mortgage partway through the loan. So, the remaining balance won't reflect the value of the house, meaning a down payment may be appropriate. 

Remember that the down payment will vary depending on how far along the mortgage the seller was before getting rid of the home.

What Are the Different Types of Assumable Mortgages?

Should St. Paul home sellers consider assumable mortgage options? The types of mortgages that are assumable could impact your decision or path forward with this option. If you have one of the following home loans, assuming your mortgage could be an option, including:

• USDA loans

• FHA loans

• VA loans

If you haven't noticed, the primary type of mortgage omitted from this list is conventional. These kinds of mortgages are not eligible for the assumption.

Process for an Assumable Mortgage

The process for an assumable mortgage is similar to obtaining other mortgages. The buyer must fill out an application and be approved to take over the loan. The lender will check their credit, assets, job, and so on. The difference comes from the terms of the agreement. 

Instead of getting current interest rates and terms, the buyer obtains whatever the seller's rate was throughout the loan so far. For example, if their interest rate was 3.25%, the buyer assumes the mortgage at the same rate. The length that they will make payments on the mortgage is the time that remains on the current mortgage. 

Therefore, they will complete payments in the same timeframe the seller was due to finish making payments.

Is This Type of Mortgage Right for You?

When determining whether this type of mortgage is right for a situation, it's best to analyze the pros and cons. We make sure we discuss these with our clients when we buy houses as well. 

Pros to Consider

One big pro comes for the seller, as they are relieved of the financial burden the mortgage imposes on them. They can pursue selling the house as is and move forward with other plans in life. 

With their newfound financial freedom, they may need to move, start a new job, or get out from under an upside-down mortgage. Whatever the case, this solution will take care of the issue for them.

The buyer also benefits because they may be able to secure better terms than they would otherwise obtain depending on current interest rates. Also, the term will be shorter than a 30-year fixed mortgage, which is a typical loan term.

Cons to Consider

On the downside, a hefty down payment can be required to secure the house due to the reduced number of payments left. This could potentially make it difficult for the buyer to come up with the cash. Additionally, the previous mortgage may have a higher interest rate than what the new buyer could obtain.

Finally, as discussed above, not all mortgages are assumable. Therefore, it might make more sense to take out a new conventional loan rather than assume an already existing government-backed loan.

Talk to a St. Paul Cash Homebuyer About Your Mortgage Options

At Homefield Homebuyers, we buy houses quickly with a fast and fair cash offer. If you're not sure if an assumable mortgage is the right path for you or if it's an option you'd like to discuss with our local team, we work hard to make the cash sale of your home simple and transparent! 

If you need to take action right away so you don't lose money on the home, our team is ready to discuss your options. Reach out to get an offer on your house within 48 hours, or we'll give you $100!