An assumable mortgage is an arrangement between a buyer and the current owner of the property regarding the remaining mortgage on the property. In this arrangement, the outstanding mortgage and its terms are transferred from the current owner to the buyer. This technique helps buyers from getting a new mortgage to buy this property.
Its Benefits
By taking over an existing mortgage, you avoid the hustle and a lengthy process of obtaining your own mortgage. This saves you a lot of time.
You could also save money on interest charges. In case the current interest rates are higher than the mortgage you are taking over; you will save money by paying fewer interest charges.
Homebuyers and sellers can save money on closing costs. In general, assumable mortgages have fewer closing costs compared to getting a new mortgage.
Disadvantages of an assumable mortgage
The reason many homebuyers get mortgages is that they cannot afford to buy a house with cash. Thus, mortgages give them a chance to own a house and pay it off through amortization or other payment methods.
You could be paying a ton of cash upfront if the house you are taking over is priced much higher than the outstanding mortgage.
For example, let us say that you are buying a $225,000 home with an outstanding mortgage of $100,000 on it. In this case, you will be required to pay $125,000 from your pocket or get another mortgage.
Should you choose to go with a second mortgage to cover the difference? You will be getting yourself in complex situations. It is difficult to have two lenders on the same property. Besides, terms of these two mortgages could be different, and therefore, you may end up paying more money than you anticipated.
Final words
Before getting an assumable mortgage, check to see if you will have enough cash to cover the difference between the mortgage and the price of the house.
If you cannot cover this difference, it may be beneficial for you to get a brand new mortgage for the property rather than having two different mortgages on it.
