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?
Savannah, mortgage outreach specialist at Alaska Housing Finance Corporation, explains:
“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.
AHFC Mortgage Outreach Specialists Savannah and Patrick provide an overview of assumptions, including questions to ask when determining if an assumable loan is the right choice for you.
Q: What should homebuyers know about assumable mortgages? What kinds of questions should homebuyers ask before taking on an assumable mortgage?
Savannah: You’ll want to know:
- What is the current loan balance?
- What is the interest rate?
- What is the remaining loan term?
- What are the additional costs, including assumption fees, closing costs, etc.?
- Are there restrictions or conditions?
Patrick adds: 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.
Q: Are there reasons an assumable loan might not be a smart choice for a buyer/seller?
Patrick: If assuming someone’s loan requires a larger down payment and you are stretching your finances thin to come to an agreement, it may not be the right choice unless you have a firm grasp of your own financing and it makes sense for you. Additionally, the market fluctuates, and you never know if assuming someone’s interest rate will turn out to be a good idea after all.
Savannah: 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, so 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.
Q: How does this work with a Veterans Affairs loan?
Savannah: 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 almost always a deal-breaker for the seller as it limits their ability to use their VA benefits for future home purchases.
In some cases, particularly with VA loans, the seller may remain partially liable for the loan if the buyer defaults and the assumption was not properly executed to release liability.
Q: How can someone search for an assumable mortgage?
Patrick: Partnering with the right real estate licensee will be a good starting point for locating properties that offer assumable mortgages. You can also search real estate websites using the keyword “assumable.”
Savannah: In addition to asking your real estate licensee to help you filter listings, you should know that For Sale by Owner (FSBO) transactions are often more open to the possibility of assuming their loan and owner-financing for the remainder, if necessary.
Q: Any final words on assumable mortgages?
Patrick: Homebuyers should go through all the normal steps, such as conducting a proper inspection of the home. Most importantly, it has to make sense for the homebuyer to assume the mortgage. Think long-term and evaluate if it makes sense for your financial goals.
Savannah: 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. Take the time to make sure you understand all the loan terms and costs.
Learn More!
Looking for more information to help prepare you for your next home purchase? Homebuyer education instructor Savannah is passionate about empowering Alaskans with information to help them achieve their homeownership goals.
Sign up for HomeChoice™, AHFC's 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.