An assumable mortgage involves the transfer of loan ownership from one party to another. Why would anyone be interested in this method of purchase? The answer to this question lies in mortgage interest rates, which are generally going up in today’s market.
Here’s how it works. Let’s say you wanted to purchase one of two identical homes in the same area, for the same price. One has an assumable 30-year mortgage, with an interest rate of 3.5%. The current mortgage has been in place for four years, and the original loan amount was $150,000. Home #2 would require you to obtain a new mortgage, with market rates of 5.0%.
The current mortgage has a monthly principal and interest payment of $673.53. With 26 years left, this would mean that your monthly payments over that time would total $210,153.84. A new mortgage for the same $150,000 at 5.0% would generate a monthly payment of $805.23. Over the life of the loan, this would set you back $289,882.80.
Keep in mind that you may pay a higher initial price for the home with the assumable mortgage, because the lower rate will make it very attractive to other buyers looking for the same thing.
Restrictions: While both FHA and VA loans are assumable, those taken out under Fannie Mae and Freddie Mac guidelines are ineligible for transfer from seller to buyer. Also note that anyone wanting to assume a mortgage must qualify for it under current lender guidelines. Your mortgage professional can lead you through this process.