The Assumable Mortgage

I was always told not to assume, because you may make an ass of yourself. In this one instance it is ok to assume. The assumable mortgage is the only assumption you may ever need to make.

 

In simple terms, a mortgage is said to be assumable if a buyer can take over the responsibility of making payments (“assuming” the loan) form the home seller. If you can assume a home mortgage when you buy a house, you may be able to finance a good portion of the cost at a bargain rate.

Example: Brad bought his home for $70,000 five years ago with a $60,000 mortgage at 9% interest rate and $10,000 cash. Now Brad sells his home to you for $90,000. There is a $55,000 balance remaining on the mortgage. If you can assume that mortgage (and come up with the $35,000 balance of the purchase price yourself). You can finance the home at a one-third discount off today’s mortgage rates. Result! Lower monthly payments and lower interest costs.

Despite recent changes in home financing and in the law on mortgage assumptions, many mortgages are still assumable by credit-worthy buyers.

All loans insured by FHA remain assumable at their original rate. Any credit-worthy buyer can assume a VA-guaranteed mortgage at its original rate. Another possibility is that you may be able to obtain a reduced-rate mortgage through the Federal National Mortgage Agency (FNMA) or Fannie Mae. FNMA is one of the largest purchasers of mortgages originated by banks. It has a step-up program, “The Mortgage Solution,” that you may find as economical as an assumption. If FNMA owns the mortgage on the home you want to buy, it will in effect give you a new first mortgage at a below-market rate.

Always ask the sellers how they financed their home. Then ask the lender whether it sold their mortgage to Fannie Mae, before you resign yourself to borrowing the full amount you need at market rates.

As my mother used to say, don’t assume anything because you may make an ass of yourself. The assumable mortgage is the one time you can assume and not worry about making an ass of yourself.

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