An assumable mortgage allows a homebuyer to take over the current mortgage and its terms when acquiring a property, potentially avoiding a new mortgage or securing better interest rates. However, not all mortgages are eligible for this option.
In a world where mortgage interest rates over 7% have become the norm, assumable mortgages are a valuable commodity for buyers and sellers. But what is an assumable mortgage?
Essentially, a buyer assumes or takes over, the previous owner’s mortgage with no changes to the loan amount or interest rate. From lower interest rates to higher property costs, buyers and sellers can benefit from this underutilized mortgage type for many reasons.
Read on to understand how you could save thousands with an assumable mortgage.
- What is an Assumable Mortgage?
- Pros
- Cons
- See All 8 Items
What is an Assumable Mortgage?
An assumable mortgage is a financing arrangement in which a mortgage’s outstanding amount and terms are transferred to a homebuyer along with the property title. By assuming the debt, the buyer either avoids obtaining a mortgage entirely or can secure lower-interest financing for the assumable mortgage.
“In today's high-rate world, that’s a huge win if the original loan has a low rate,” says real estate investor Brett Cobb, founder of Premier OKC Home Buyers. “Buyers who want to save big and sellers looking to sweeten their deal in a tight market should definitely consider it.”
Not all mortgages are assumable. Government-backed loans like Federal Housing Administration (FHA), Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loans, all of which typically have low interest rates and favorable terms, are, in most cases, assumable.
Conventional home loans backed by Fannie Mae and Freddie Mac are usually not assumable.
“We don’t see these often, as people generally sell their homes for more than they owe,” says Rose Krieger, a senior home loan specialist at Churchill Mortgage. “If it’s done at all, it’s usually with family members, like parents transferring to their children.”
Assumable mortgages differ from traditional ones because the buyer doesn't have to go through the rigorous approval process with a bank or lender.
The major advantage of this is cost savings. Buyers can save on interest rates, sometimes up to a 5% annual percentage rate (APR) difference and closing costs with a mortgage they assume. In most cases, there’s no need for another appraisal. For sellers, this can be a major marketing point with the possibility to increase the property’s asking price.
Pros
- Potentially lower interest rates: Assuming a mortgage with a lower interest rate could save you thousands, especially when interest rates are high.
- Easier qualification process: While lenders still check credit scores, income and the debt-to-income ratio of buyers applying to assume a mortgage, criteria are generally more lenient.
- Transferable terms and conditions: You can pass your assumable mortgage on to other buyers, potentially securing a higher home sale price.
Cons
- Increased risk of defaulting on the loan: Depending on the terms of your assumable mortgage, the original borrower may not be relieved of their debt payment. If they default on the loan, you may lose your house even if you made all your monthly payments.
- Limited lender options: With an assumable mortgage, you’re locked in with the previous homeowner’s mortgage lender. This limits your ability to shop for the best available terms. While this isn’t necessarily a disadvantage, it’s a factor to be aware of especially if you only want to work with certain lenders.
How Does an Assumable Mortgage Work
An assumable mortgage works by allowing potential homebuyers to assume the existing mortgage of the sellers. When a homebuyer takes out a mortgage from a lending institution or bank to finance a property, they receive a contractual agreement with the bank that outlines the repayment period, interest rate and principal payment to the lender.
It might be assumable if the home loan is an FHA, VA, USDA loan or an adjustable-rate mortgage (ARM). If the original homeowner decides to sell the home, they may transfer the mortgage to the new homebuyer.
With an assumable mortgage, the homebuyer assumes the current principal balance, interest rate, repayment period and any other terms of the seller’s original mortgage contract. For new homebuyers, this saves time from the rigorous loan process. Instead, they can easily take over the mortgage.
The potential cost savings is significant. With some VA or FHA loans carrying interest rates under 3%, new homebuyers could save thousands throughout the loan. For that reason, they’re usually willing to put in higher bids on the properties, allowing sellers to walk away with more cash in hand.
Are Assumable Mortgages Worth It?
Assuming a mortgage, especially in times of high interest rates, can lead to long-term financial savings. Even if you pay more for the property, you can save in the short and long term. With careful research, assuming a mortgage could help you save thousands or hundreds of thousands of dollars on interest payments.
However, it’s important to note that the original buyer isn’t always relieved of their debt payment obligation. They will have to ask the lender to be released of their liability, which the lender can approve or deny. You may lose your house if they’re not relieved of their liability and default on the loan.
You can ask realtors whether the home has an FHA or VA loan and you could be on your way to assuming a mortgage. To start comparison research, you can find the best mortgage refinance rates or the best current 30-year mortgage rates.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Brett Cobb, a real estate investor and owner of Premier OKC Home Buyers and Rose Krieger, a senior home loan specialist at Churchill Mortgage.
Frequently Asked Questions
What are the downsides of an assumable mortgage?
The potential downside of an assumable mortgage is that the original buyer isn’t always relieved of their debt payment, meaning your house can be foreclosed on even if you make all your monthly payments.
How much does it cost to do an assumable mortgage?
The closing costs on an assumable mortgage are typically 2-5% of the total loan amount.
Do you need a down payment for an assumable mortgage?
In most cases, you must make a down payment on an assumable mortgage. The exact amount depends on the loan size you’re taking over, the original buyer’s payment history, credit scores and more.
Sources
- Brett Cobb, real estate investor and owner of Premier OKC Home Buyers
- Rose Krieger, senior home loan specialist at Churchill Mortgage
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.
