About a year ago, mortgage interest rates were so low that everybody was scrambling to refinance their existing mortgages or buy. Now, you may get sticker shock just by looking at how fast the interest rates are climbing.
The volatile housing market has made everybody anxious. Sellers want to get out of their homes while the housing values are high, but buyers are struggling to afford the loans they need because of those unpleasant interest rates. That’s why assumable mortgages are, once again, attracting a lot of attention.
What’s an assumable mortgage?
Basically, it’s any mortgage that allows a new owner to take over the remaining loan – exactly as it is – from the prior owner.
While the vast majority of conventional mortgages don’t allow one person to “assume” another’s mortgage (except under special circumstances, like through inheritance or after a divorce), FHA loans, VA loans and USDA loans can all be assumed. The would-be buyer need only meet the requirements set by the agency involved and have enough money on hand to buy out the current owner’s equity in the home.
The benefits to the seller are that they may have an easier time offloading their home while housing values are high. Closing is usually quick and easy. The benefits to the buyer are that they can keep that lovely, low interest rate that the prior owner enjoyed, saving them thousands over the lifetime of their loan.
So what’s the main drawback?
Buyers always need to beware, no matter what they’re buying or how they’re buying it – but especially when it comes to real estate. In many cases, home inspections can be skipped when a mortgage is assumed, but that’s generally a bad idea. What you might save on the inspection could be a pittance when it comes to the hidden repairs a home may need.
You also need to do a comprehensive title search to look for mechanic’s liens and collection actions against the current homeowner. If you don’t, you could end up assuming that debt when you assume the mortgage – and that could eliminate any benefits you might otherwise see.
Real estate issues crop up unexpectedly all the time, especially when the housing market seems very unstable. If you run into a problem, don’t try to handle it on your own.