What is 'Assumable Mortgage' An assumable mortgage is a type of financing arrangement in which an outstanding mortgage and its terms can be transferred from the current owner to a buyer. By assuming the previous owner's remaining debt, the buyer can avoid having to obtain his or her own mortgage. BREAKING DOWN 'Assumable Mortgage' Many homebuyers typically take out a mortgage from a lending institution to finance the purchase of a home or property. The contractual agreement for repaying the property loan includes the interest rate which the borrower has to pay per month in addition to the principal repayments to the lender. If the homeowner decides to sell his home at some time in the future, he may be able to also transfer his mortgage to the homebuyer. In this case, the original mortgage taken out is an assumable mortgage. An assumable mortgage allows a homebuyer to assume the home seller’s mortgage – current principal balance, interest rate, repayment period, and any other contractual terms of the mortgage. Rather than going through the rigorous process of obtaining a home loan from the bank, a buyer can take over an existing mortgage which could be a cost-saving advantage depending on the interest rate environment. In a period of rising interest rates, the cost of borrowing also increases. When this happens, borrowers taking a loan will be given high interest rates on any loans approved. Therefore, an assumable mortgage during this period is an attractive feature to a buyer who will be taking on an existing loan that was made during a time of lower interest rates. While lending institutions will have increased interest rates to reflect the current state of the economy, an assumable mortgage will not be impacted by the changes since the homebuyer will be bound to the terms of the existing mortgage contract which would have a relatively lower locked-in interest rate.
Blog Archive2019-01-24 14:14:42
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