Definition of Assumable Mortgages
An assumable mortgage has clauses that make it transferable to another buyer. This makes the mortgage more flexible and offers certain benefits to buyers as well, but the lender must be willing to handle the extra paperwork that makes assumable mortgages possible. Assumable mortgages vary in popularity depending on the current housing market and interest rates.
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Definition
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An assumable mortgage starts off as an ordinary mortgage to a home buyer, with an ordinary interest rate and length of term. However, if the borrower wants to sell the home, he can sell the mortgage with it. This switches the mortgage and all of its terms, unchanged, to the new home buyer, who now makes payments to the lender.
Purpose
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For the original borrower, the assumable mortgage allows him to get rid of a debt while selling his house. While lenders need to switch buyers, the terms of the loan stay the same, so some of the decisions have already been made. Buyers may look for assumable mortgage homes to find a better deal on financing. They are flexible loans and are generally more attractive to borrowers than other types of home loans.
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Process
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When a new buyer wants to assume the mortgage, the lender examines him and his credit history very carefully. He must be approved for the mortgage in the same way the original borrowers were, and if he is not approved then the financing will not be switched. If he is approved, the lender names him the new borrower, his name goes on the loan and the deed, and the old borrowers receive a letter saying the lender has no further claim on them for payments.
Benefits
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Buyers look for assumable mortgages when they want a loan interest rate lower than the market rate. If loan rates are on the rise, then the older rate of the assumable mortgage will be less than the buyer would get on a new mortgage. When the borrower takes on an existing mortgage, he tends to take on more favorable terms in an active housing market.
Considerations
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If loan rates are falling, an assumable mortgage will actually cost a new buyer more money in payments, so no buyer has any desire to purchase such a mortgage in a slowing housing market with low interest rates. Additionally, the lender requires extra fees from the borrower to switch the names on the loan.
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References
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