Understanding Assumable Mortgages

When you are in a process of buying a home, there’s a buzz phrase that sometimes comes up, especially when talking about lower interest rates of a few years ago: “assumable mortgage.”

What actually is an assumable mortgage – and can it actually get you those lower interest rates of previous years? From AHFC's mortgage department, here is an overview of assumptions, including questions to ask when determining if an assumable loan is the right choice for you.

What is an assumable mortgage?

An assumable mortgage allows a buyer to take over the seller’s existing loan, including its interest rate, balance and remaining term.

With an assumable mortgage, the homebuyer takes on the home seller’s existing loan. If the interest rate on that loan is less than the current market, homebuyers can benefit from a lower interest rate.

However, a mortgage that has been assumed only includes the remaining balance on the seller’s loan, and nothing more.

If a homebuyer purchases a home at $400,000 list price and there is $300,000 remaining on the assumed loan, the new homebuyer has to make up the $100,000 difference out-of-pocket or, sometimes, with a second mortgage.

Because of this, assumable mortgage may make more sense for those with more home equity than first-time homebuyers.

Assumable-eligible mortgages occupy only a small portion of the market and can be hard to find, but all Alaska Housing Finance Corporation single-family loans are assumable for qualified borrowers unless otherwise noted.

When assuming a loan, it’s always important to talk to your lender and understand all the terms and conditions of your loan. When assuming a mortgage the buyer must meet the lender’s qualifications, similar to applying for a new loan.

What should homebuyers know about assumable mortgages?

When considering assuming a mortgage, you’ll want to know:

1. The current loan balance
2. The interest rate
3. The remaining loan term
4. The additional costs, including assumption fees, closing costs, etc.
5. Any restrictions or conditions

Additionally, it's important to understand that usually the sales price is different from the remaining loan balance because the equity belongs to the seller. You may have to bring a larger down payment to closing than usual but this varies depending on the situation for each transaction.

Reasons an assumable loan might not make sense for the buyer/seller

If assuming a loan requires a larger down payment and the buyer is stretching their finances to come to an agreement, it may not be the right choice. Additionally, the market fluctuates, meaning you never know for sure if assuming an interest rate will turn out to be advantageous.

While assumable mortgages can be attractive to buyers, sellers may weigh the potential downsides and opt for a more conventional sale.

• Assumptions take longer than traditional sales transactions. If there is a sense of urgency with the transaction, assumptions are generally not recommended.
• If the home’s market value significantly exceeds the loan balance, the seller might prefer a buyer who can secure financing at the full price, maximizing profit without complicating the transaction.

Assuming a Veterans Affairs loan

Non-Veterans can assume a VA loan but if the new buyer is not eligible for VA benefits, the seller’s entitlement (the amount the VA will guarantee on the veteran's loan) remains tied to the loan. This is usually a deal-breaker for the seller as it limits their ability to use their VA benefits for future home purchases.

Finding an assumable mortgage

• Partner with a real estate licensee for help locating properties that offer assumable mortgages. 
• Search real estate websites using the keyword “assumable.”
• Tip: For Sale by Owner transactions are more likely to be assumable.

Final words on assumable mortgages

"Not all mortgages are assumable, and while a lower interest rate can be advantageous in a market with rising interest rates, there are reasons why it might not be smart for the buyer or seller," says Stephanie, AHFC underwriting officer.

"Take the time to make sure you understand all the loan terms and costs.  Think long-term and evaluate if it makes sense for your financial goals."

Learn More!

Looking for more information to help prepare you for your next home purchase? Sign up for a no-cost homebuyer education class to learn more about the different types of loan options, finding a real estate licensee, shopping for a home and much more.​​​