An assumable mortgage is just what it sounds like. It’s a process in which someone selling a home can transfer their existing mortgage to the buyer (the buyer being able to “assume” the mortgage). However, there is a lot more to it than the buyer simply taking over payments.

Trending Higher Interest Rates make an Assumable Mortgage Attractive to Buyers

One thing that makes an assumable mortgage attractive to potential buyers is the fact that when they assume the debt it stays at its original interest rate. This can amount to quite a bit of savings versus the buyer having to get a new mortgage to cover the purchase. The lower the interest rate on the original mortgage, the more attractive it could be to any potential buyers. This can be especially true during times of very high interest rates.

How Beneficial an Assumable Mortgage is depends on the Property Value and Interest Rate

If the value of the property in question is close to the amount owed on the mortgage, then the buyer can simply take over payments and save money with the lower interest rate it comes with. However, if the property value exceeds the value of the existing mortgage the buyer would have to either pay the difference as a down payment or get a second mortgage to cover the difference. In some instances the difference between the two sums is large enough to make the deal unattractive.

Potential Buyers must still Qualify for the Assumable Mortgage

Just as when purchasing a home, the buyer’s credit must qualify him for the amount of the loan. Of course, the initial lender must be amicable to the agreement as well. Without this approval the buyer cannot assume the mortgage even if they are qualified otherwise. The buyer must also pay any fees involved with the sale such as closing costs, appraisal fees and title insurance.

Potential Risks involved with an Assumable Mortgage

Anyone considering selling a piece of property through an assumable mortgage should always make sure to have a full release of debt from the lender in writing at the time of the mortgage transfer. If not, should the buyer default on the loan at a future date the lender could potentially still hold them liable for the debt. Such a situation could lead to the lender filing suit against the original mortgage holder for any balance that is owed on the debt. It could also drastically impact the original mortgage holder’s credit rating, especially if the suit goes against them.