When one is buying a home, it would be remiss not to consider the many options when it comes to home loans. One of these options is assumable home loans. An assumable loan is a contract that allows the buyer to assume the sellers home loan contract. This is a situation that is not always doable with lenders, as some do not allow it as an alternative to a traditional home sale.
An assumable mortgage is one where the current homeowner transfers their mortgage obligations to a buyer who is qualified to take it on. In the seventies and eighties, this was a popular way to purchase a home and the lender’s permission was not needed. Of course, in society today borrowers need to get everything approved by their lenders.
Taking on an assumed loan is a big responsibility and there is little flexibility available to the borrower. Currently the interest rates on homes fluctuate due to what is going on with the economy. In response to this, buyers are always shopping around for good interest rates. Now when the market is doing well and the interest rates are up buyers are driven to look at taking on an assumed loan as they are searching for lower interest rates. On the flip side of this however when a buyer takes on an assumed mortgage they take on the current mortgage obligations. This means they will have to take on the existing interest rate. The downfall of this however is if the market crashes and rates go down the buyer is stuck with the assumed rate for as long as the contract is valid.
When taking over an assumed loan buyers need to think through the situation carefully and ask a few questions. One factor they will need to consider is the difference between assuming an existing loan and taking on a new loan. To fully understand the differences between the two the buyer will have to acquire the balance and time remaining on the existing loan and compare the cost of the loan to what it would cost if it were a new loan. Buyers should also think about how long they intend to live in the home. This will give them a time frame to work with when they are deciding whether saving on interest rates by assuming a loan is worth their while.
When buying a home and taking on a new loan, buyers often have to pay settlement costs. A benefit of the assumed loan set up is that these fees are avoided if one takes this route.
Buyers are not the only ones who benefit from this type of loan. This set-up will often provide the seller with many positive pay offs as well. Both parties will share on the costs saved with this agreement. Quite simply the seller will have the possibility of receiving a higher price for the home as the buyer will need to come up with a hefty down payment in some cases. This is dependent on how much of the actual home loan is left.
The assumable loans that are out there today often come with an adjustable rate. While an assumable loan may be a good option for some, it is not for everybody. Do not make this decision without putting some serious thought into the pros and cons of the situation. Take time to consider the differences between taking on an existing loan and getting a new one and if the borrower is at all confused, they should consult a financial advisor to help them make a well informed decision.
Financing