If You See An Assumable Mortgage – Grab It
People are asking what is an assumable mortgage ? What does an assumable mortgage do for me? What are the main benefits of such mortgages and what are the pros and cons of assuming a home loan. The assuming mortgage markets has three sides the seller side and the buyer side and the lender side. In this short review you can read more on assumable home loans and their pros and cons on each of the parties involved.
What Is An Assumable Mortgage
Assumable mortgage is when the seller sells the home together with the mortgage liability on the property to the buyer.
This financial situation will be beneficial to all sides (except the lender..) when the seller has a low mortgage rate on the home, and the current market rates are much higher. The buyer if he wants to buy the home, he will need to apply for a mortgage at current market rates, which may end up in an expensive mortgage and high payments.
Because the seller sells the home with the mortgage on it to the buyer, the lenders looses the delta between the seller rates and the current rates.
For example: If a person buys a home and took an assumption mortgage at 5%; a few years later the mortgage rates rise up to 8%. When the seller will want to sell their home, the buyer can either apply for th current 8% mortgage, or buy the home with the existing 5% mortgage left on it.
In this example, the seller will be able to sell their home in no time! Because the home has a huge incentive value to it; in some cases the seller will be asking for a price higher than the market value to benefit from the assumption mortgage added value. The buyer has an incentive to buy the assuming mortgage, and they will save 3% on the mortgage interest and saving on all the settlement costs on a new mortgage.
If it is so lucrative… Where is the sting?
Lenders Don’t Like Mortgage Assumptions
The only side loosing from such deals are the lenders. So they have an incentive to block such assuming loans from rolling between the seller and the buyer. Most lenders will block any option for such assumption mortgages by lenders have inserting due-on-sale clauses in their notes.
This means that when you get the loan you sign that in case you sell the home in the future you must pay off all remaining mortgage left on the home before the liability is moved to the buyer. With these due-on-sale clause most lender block their future losses if the interest rates rise.
Some lenders will allow the mortgage assumption, which will save some of the mortgage costs, they usually allow the mortgage loan assuming that the interest rate will be current as the market rate at the time of the new transaction between the seller and the buyer. Of coarse this takes the value from the assumed mortgage loan, if the rates are raised than the buyer has no incentive to get the home with the mortgage on it.
Remember that the buyer will need to pay the seller all the equity built on the home usually as down payment. On top of the large down payment the buyer will be forced to pay a high (current) mortgage rate to the lender.
All except the FHA and the VA loans. The FHA mortgages are assumable mortgage loans allowing the seller to assume that future rates will rise, and to sell the FHA backed mortgage to the buyer with the lower rates as a bundle deal.
FHA Assumable Mortgage Loans In a Nutshell
What is an FHA assumable mortgage loan? these types of home loans are still available today, and they can be a smart investment because the national mortgage rates are near the lowest point they have ever been. This means that as a buyer you buy a low interest rate and also the knowledge that in the future you could sell your home at higher price (the assumable mortgage has value!). The assumable FHA mortgage loan may cost some more because of the insured mortgage fees, but this is probably worth the price as this mortgage could be sold later on with a home at a higher market value.
The FHA assumable mortgage loans are valuable when the seller wants to sell their home in the future. In order for the buyer to be able to get the assumable mortgage loans, the buyer will need to qualify as regular FHA home mortgage borrower. If they meet all the minimum FHA requirements, the mortgage could be transfered to the buyer and all liabilities on the home are passed together with it.
There are several ways to calculate the value of the assumable mortgage loan to the buyer and to the seller, as they will both want to benefit from the value this kind of home mortgage holds in the unstable markets ahead. These calculations include the saving on settlements costs and fees, savings on the mortgage rates, and on the investment value of the savings from the assumable mortgage loans for the time the buyer plans to stay at the new home.