If you and your family are looking at homes for sale, assuming the mortgage on a home is an option you should explore. As with the purchase of any home, there are requirements that must be met to receive lender approval for the home. To help you determine whether or not an assumable mortgage is right for you and your family, here is what you need to know.
What Is an Assumable Mortgage?
An assumable mortgage simply means that when you purchase a home, you take over the seller's existing mortgage loan. When you do, the seller's responsibility for the loan ceases and you continue the payments. In most instances, there are no changes to the terms of the loan.
For instance, if the seller originally had a 30-year agreement with his or her lender and has made payments for the last five years, you will continue with the payments for the remaining 25 years of the agreement.
Why Should You Opt for an Assumable Mortgage?
There are several advantages to an assumable mortgage. For instance, if the interest rate for the home is less than the current interest rates, you could assume the loan at the lower rate. As a result, you would save money on the purchase of your home.
Another advantage of an assumable mortgage is that you could possibly save on closing costs. The lender might also allow you to take up the existing mortgage insurance payments as opposed to finding a new policy, which could be more expensive.
Are There Any Drawbacks?
Although there are benefits to an assumable mortgage, there are a couple of drawbacks. You must meet the qualifications set by the lender to take up the home. In essence, you have to go through the entire loan approval process with the lender. It is possible that your loan could be denied.
Another drawback is that depending on the current value of the home and the amount of the loan, you might have to pay a larger down payment than you expected. If the value of the home increased since the loan was taken out, you could be required to pay the difference between the principal owed on the home and its current value.
If you do not have the cash on hand to cover the difference, you can take out a second mortgage. It is important to note that you will have to meet the requirements of the lender and you could be faced with a high interest rate.
Work with your real estate agent to determine whether or not taking an assumable mortgage is the right decision for you and your family.