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Investing in Real Estate Using Assumable Mortgages

July 26, 2016

There are two variations of this strategy. There is the “Subject to” and there’s the regular ol’ “Assumable Mortgage”. Click Here to see more on the Subject to strategy.  For now we’ll just talk about the assumable mortgage. This is an alternative to the investor going to the bank to take out a mortgage for the purchase. With an assumable mortgage, the investor has the ability to take over the existing mortgage of the seller as long as the lender of that mortgage approves.

 

If interest rates have risen since the original mortgage was taken out by the seller, the investor is the party that benefits the most from this strategy. The reason for this is that if interest rates rise, the cost of borrowing increases. Therefore, if the investor can take over the seller's relatively lower-rate mortgage, the investor will save having to pay the higher current interest rate. However, the full cost of the home isn’t always covered by the assumable mortgage and may require either a down payment on the rest or additional financing.

 

For example, if the seller only has an assumable mortgage amount of $100,000 but is selling the home for $150,000, the investor will have to come up with the additional $50,000. In other words, the investor can only assume $100,000 worth of the cost of the house, meaning the rest of the cost of the house may have to be borrowed at the higher current interest rate. And although the mortgage is assumed from the seller, the lender can change the terms of the loan for the investor depending on several factors including the investor's credit risk and current market conditions.

 

One unique risk for this type of mortgage can exist for the seller of the home. An assumable mortgage can hold the seller liable for the loan itself even after the assumption takes place. As such, if the investor were to default on the loan, this could leave the seller responsible for whatever the lender is unable to recover after foreclosure.

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