What is an assumable mortgage? True to its name, it’s a type of home loan where the buyer takes over the seller’s mortgage, rather than applying for a new loan. Assumable mortgages offer an array of advantages over traditional loans, but not all mortgages can be passed along in this manner. Here’s how to tell if an assumable mortgage is something you should consider, as a home buyer or seller.
What types of mortgages are assumable?
Conventional loans are not eligible for assumption; they require the loan be paid in full—and a new one issued—whenever a property is sold or transferred to a new owner.
The three types of loans that are assumable include the following:
- FHA loans: These loans are backed by the Federal Housing Administration, which grants loans to low-income borrowers who might not quality for a conventional loan. Keep in mind that the new borrower, like the old, must qualify under all FHA terms, including credit and employment standards.
- USDA loans: These loans are offered or backed by the U.S. Department of Agriculture to low-income borrowers in rural areas. As above, the new buyer will need to meet the USDA’s credit score and income guidelines.
- VA loans: These loans, offered to active or retired military, can even be assumed by nonveterans.
Benefits for the buyer
Assumable mortgages can benefit buyers in numerous ways:
- A low interest rate: The key benefit to assuming a loan is snagging a lower interest rate than what is currently available. For instance, if the seller took out a 30-year fixed-rate loan of $200,000 at 4.2%, the monthly mortgage payment would total $978. If you were to borrow $200,000 at a slightly higher 5.2% rate, your monthly principal and interest payments would total $1,098. “Assumable loans are most logical in a rising rate environment, which this is becoming,” says Todd Huettner, founder of Huettner Capital in Denver.
- Fewer upfront costs: Since you aren’t getting a new loan, your costs for getting a mortgage will be greatly reduced. This can be a particular benefit if you’re assuming an FHA loan, since you won’t need to pay upfront mortgage insurance costs; you’ll just be responsible for the ongoing insurance payments for the life of the loan.
- A shorter loan life: Since the seller has already repaid the initial years of the loan, you would need only to make payments for the remaining years. So, if the original borrower was five years into a 30-year loan, the buyer assuming that would pay for the remaining 25 years.
- Long-term savings: This combo of a lower interest rate, fewer upfront costs, and a shorter loan life add up to major savings. You can calculate these savings with an online mortgage calculator.
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