Assumable Mortgage

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Definition

An assumable mortgage is a type of mortgage in which allows an individual can sell his/her property to a new buyer and transfer the remaining mortgage along with its terms, usually with little or no change in terms, to the new buyer. When interest rates rise, assumable mortgage is an attractive feature to a buyer who takes on an existing loan made during lower interest rates. There are only two types of loans that are assumable are loans insured by the Federal Housing Administration (FHA) and the US Department of Veterans Affairs (VA).

Typically, home-buyers take out a mortgage from lending institutions while purchasing a home or a property. This mortgage is a contractual agreement for repaying the loan that includes the interest rate which the borrower has to pay every month in addition to the principal repayments to the lender. In case the homeowner decides to sell the home in the future, he can also transfer his mortgage to the new home-buyer. Here, the original mortgage taken out is an assumable mortgage.

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LAYMEN TERMS

Let's say an individual takes a loan $XYZ to buy a house. After few years, he decides to sell off the house but his loan payment is still going on. He gets a buyer and the buyer buys the house and also takes over the loan on him. So now, the buyer starts paying the rest of the loan of the seller. This loan is an assumable mortgage.

HOW DOES THIS TERM APPLY TO YOU

Suppose you are selling your property and you have an assumable mortgage amount of $100,000. However, you are selling the property for $140,000. Now, the buyer will be responsible for the additional $40,000. Basically, the buyer can only assume $100,000 worth of the cost of the property. The rest will have to be borrowed by the buyer from the same lender at the current interest rate.

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