Are you considering buying a home but the rising interest rates are making you rethink the timing? What if I told you some sellers may be able to extend their low interest rates to you via an assumable mortgage. An assumable mortgage allows a buyer the chance to purchase a property by taking over the seller's mortgage loan. This appealing option can be leveraged “when a buyer can take advantage of financing with a lower interest rate if rates have risen since the seller originally purchased the home,” according to rocketmortgage.com.
While not all mortgages are assumable, many FHA, VA and USDA loans are. However, it may require a Goldilocks approach. The conditions have to be just right. The buyer, in essence, would “take over” a sellers’ pending loan amount at their lower interest rate after getting approved through a very similar process as a conventional loan. The buyer would have to pay the difference between the loan amount due and the sales price. For example, the seller owes $500,000 on their $750,000 loan. She lists her home for $1 million. The approved seller would assume $500,000 at the predetermined lower interest rate and owe the seller the additional $500,000. This is typically paid as a large cash deposit or requires out-of-the-box thinking regarding additional funding.
The new borrower assumes the existing mortgage exactly as it is, with the same lender and remaining balance, interest rate, and repayment terms. There even may be a few areas of cost savings including appraisals and reduced closing costs.
If you are thinking of listing your home for sale and you currently have a mortgage, it behooves you to check if your mortgage is assumable as it may help make your home very attractive to a buyer who needs to finance. You can check your loan documents to see whether assumptions are allowed. There often is an “assumption clause” that would explain whether this is allowed or not. You may also find it in a section called “due on sale clause”. As an alternative, you can call your lender and ask them to check on it for you, especially if you have a good relationship with your lender. If you were lucky enough to mortgage your home when the rates were real low, then your assumable mortgage could be a huge selling point!
If this all sounds complicated, it is because it is complex. But this solution may make sense for some and may be selling feature if the market softens a bit and more inventory surfaces. In the event that you go down this road, whether on the buyer or seller side, align with a knowledge closing attorney.