Month: July 2016

If you are a seller with an assumable mortgage, the buyer of your home can assume the payments on the loan balance you have remaining at that time. But is this a good idea?

Some loans are set up to be assumable; mortgages such as FHA loans, for example, come with an assumption clause, meaning that a buyer can take over your monthly mortgage payments. On the other hand, conventional mortgages – those created under Fannie Mae or Freddie Mac guidelines – will come with what is called a “due-on-sale” clause. This means that when you sell the property, if there is still a balance on the mortgage, the mortgage must be paid off at that time.

Why would you want your buyer to assume payments? It’s usually about the interest rate on your mortgage. If, for example, your FHA mortgage interest rate is in the 3% range, and the current market is offering rates above that, you can make your property more attractive relative to your competition by showing buyers that there is a financial incentive to purchasing your home; the buyer can assume your mortgage at that lower interest rate…providing your lender allows it.

In fact, to assume your mortgage, the buyer would still have to go through a qualification process with the lender, and your sale would be contingent on a successful outcome of this process.

An assumable mortgage does have its benefits, but it may not be right for you. Discuss the pros and cons with your mortgage advisor.

There are a variety of fees you may incur in your mortgage transaction.

One is an origination fee, which is paid directly to your lender for the work involved in reviewing and approving your loan.

Origination fees are expressed in points or as a percentage of the loan amount. A 1.25% (1.25 point) origination fee on a $100,000 loan will cost you $1,250.

Lenders need to make money in the mortgage process, either through the fees they charge directly to the borrower (such as the origination fee) or through the rate they charge.

For example, lender A is offering a 0 point (no origination fee) conventional mortgage for 4%.

That means that lending company A will make most of its money when your loan is sold to Fannie Mae or Freddie Mac on the secondary market.

But this is also good for you: if you’re tight on cash, you don’t have to come up with the origination fee, saving you thousands of dollars at closing.

Again, the lender will make most of its money when the loan is sold.

Mortgage lender B also offers you a conventional mortgage, but lender B is offering a rate of 3.75%, with a 1 point origination fee, which you’ll pay directly to B at closing.

This means lending company B accepts that it will make little or no money when the mortgage is sold.

This is OK, though, because company B has already made its money from the origination fee.

This may also work in your favor, providing you have sufficient funds at closing to pay the origination fee.
You’ll get an interest rate that is lower than you would get from lender A, and a lower monthly payment.

If you plan on remaining in the property for many years, it may be in your financial interest to pay an origination fee at closing.