ASSUMABLE MORTGAGES
Allows another borrower to take over.
An assumable mortgage is, simply put, one that the lender will allow another borrower to take over or “assume” without changing any of the terms of the mortgage. For example, say you purchased a property for $200,000 with a mortgage of $150,000 and $50,000 of your own money. If part way through the mortgage term you decide you’d like to sell the home, you would have the option of essentially selling the mortgage as well. The person who buys the home from you could take over the balance of the mortgage and the associated payments and give you cash for the remainder of the value of the home. So, if your mortgage balance is now $140,000 and the home is now valued at $210,000, a buyer who is assuming the mortgage would need to pay you, the seller, $70,000.
In cases where a home and a mortgage are being sold together, the interest rate environment can affect the selling price of the property. If rates have risen since the mortgage term began, that mortgage is now more valuable because it comes with an interest rate lower than what you would find if you applied now. Thus the calculation of the home’s value becomes a little more complicated as the beneficial interest rate needs to be taken into account.
There are several aspects of assumable mortgages that make them attractive to people on both sides of the real estate transaction. If you’re the seller in this equation and you’re willing to have someone assume your mortgage (i.e. you don’t need to port it over to your new property), then you may be able to get a better selling price for your home, and you will have a different pool of potential buyers.
However, there is come caution with assumable mortgages. In cases of default by the new borrower, the lender can come after the original borrower in order to get its money back. This can become a real problem if the new borrower has not taken good care of the home and has negatively impacted its resale value.
If the home cannot be sold for enough money to pay back the mortgage, the original borrower could be sued for the shortfall. In short, despite no longer being on title, if you sell your home and allow the buyer to assume your mortgage you could still be pulled back into that debt if the buyer is not able to meet his or her obligations.
Lenders have the option clauses in mortgage contracts that expressly forbid other borrowers from assuming the mortgage without qualifying, or that specify that the mortgage must be paid out on sale of the property. Since most buyers and sellers don’t want to challenge the banks, this has made mortgage assumptions fairly uncommon. However, if an assumable mortgage is something that you’re interested in, talking to your mortgage broker is a great place to start.
