How to Assume a Mortgage
When trying to assume a mortgage there are a few steps that you need to take. If this is your very first time and you do not know much about assuming a mortgage, then take these tips along with you when house hunting.
When assuming an existing mortgage, you’ll have to pay some cash to the seller to compensate him/her for the amount of equity that he has in the home. It’s kind of like a down payment, since it’s cash paid directly from you to the seller, but not exactly. The down payment made when you get you get your own mortgage is done because the lender requires it; they want there to be some equity already in the house in case you don’t make your payments right away and they have to repossess it.
On the other hand, when you assume the mortgage, you don’t always have to satisfy the bank, but you do have to compensate the seller for the amount of equity that (s)he has in the property (i.e., the amount that the seller paid as a down payment, plus the amount of principal payments made towards the loan, plus the amount the property has appreciated since s/he bought it).
Benefits of Assuming a Mortgage
One primary benefit of assuming a mortgage is that you can take over payments under the borrower’s original interest rate. If interest rates when the borrower first obtained the loan were much lower than they are currently, this leaves you with a more affordable monthly payment than if you had sought your own mortgage loan. Assuming a mortgage also negates the need to pay a down payment or closing costs. If the seller has equity in the property, however, he will likely expect you to compensate him for the loss. Also the cost of assumed property will differ if there are renovations made by the seller.
