Assumable Loans
In certain scenarios, it might make sense to consider an assumable loan. With this type of loan, the homebuyer essentially purchases the seller’s current mortgage loan and assumes the terms of that loan. This might be an appealing option if the current market interest rates are higher than the interest rate the seller has locked in on their loan. It’s important to do thorough research on the current mortgage options to see if there really is an advantage to assuming a seller’s loan.
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How these Loans Work
With an assumable loan, the seller transfers the balance of the mortgage and complete terms of their loan to the buyer. Instead of paying a down payment to the mortgage lender, you are responsible for paying the seller for equity they have built with the loan. This means you could find yourself locked into a very desirable interest rate, a VA loan that you wouldn’t have otherwise qualified for or realize that you only need to put down a very small payment to buy the loan from the seller.
Benefits of an Assumable Loan
This type of loan is enticing under certain circumstances. The key is to determine if the terms are the loan you are buying are more favorable than what is currently available. Namely, if the assumable loan has a lower, fixed interest rate than the current market rate, and if the seller does not have a lot of equity built up in this loan, it’s worth pursuing.
Disadvantages to Consider with an Assumable Loan
There are several important pieces of information that (depending on your financial situation) could be disadvantageous.
If you assume a loan that is less than the selling price of the house, you’ll need to either provide the difference in cash, or take out a second loan. For example, if you intend to purchase a house for $200,000 and the remainder of the seller’s mortgage loan is $150,000, you will need to come up with the additional $50,000. If the seller has been paying the loan off consistently and has a good amount of equity in their home, you could easily run into this scenario. Oftentimes, it’s more difficult to obtain a second mortgage for this small amount.
Additionally, there could be limits on the type of loan you are able to assume. Due to the increased restrictions in the lending industry, assumable loans are less common now, and are typically FHA or VA loans.