What Are the Pros & Cons of Taking a Mortgage?

From the 1970s and 1980s, numerous mortgages were assumable, or able to be assumed or taken on by the person purchasing the property. Throughout that time, interest rates swelled and banks realized they were losing out on profit because borrowers were supposing their mortgages with low rates instead of getting fresh mortgages at elevated rates. Since the late 1980s, many loans have been composed with due-on-sale clauses: complete repayment of this loan is due when the building is sold. Federal Housing Administration and Veterans Administration loans are assumable so long as the borrower qualifies. Sometimes privately financed loans and mortgages on commercial properties are also assumable.

Terms Might Be Favorable

The obvious benefit of an assumable loan is the fact that it might be at a lower interest rate than a mortgage that you could obtain today. If that is true, an assumable mortgage has been an advantage to both buyer and seller. In case the difference in interest rate is considerable, the seller might even be able to increase the asking price on his house to reflect the economies that go with the loan.

No or Low Loan Prices

Another benefit of an assumable mortgage is that the loan origination fee will be reduced or absent entirely. The bigger the loan, the more advantageous the assumption becomes because the loan origination fee generally reflects the amount of the loan. If the mortgage interest rate and loan origination costs are lower compared to that which could be located on the available, an assumable loan can't be beat.

Conditions Could Be Bad

In times of low interest rates, an assumable fixed rate loan offers only downsides. If the loan has a prepayment penalty associated with it, then the seller may require the purchaser to spend the loan or pay the prepayment penalty as a condition of sale. This can be disadvantageous to the seller, that will most likely have to decrease the purchase price of the construction to reflect the penalty. The purchaser may also be at a disadvantage if he nonetheless buys the construction with the assumable loan then has to market before the penalty period has elapsed.

No Qualification Requirements

Though both FHA and VA assumable loans need that the purchaser to qualify for the loan so as to assume it, occasionally private creditors compose assumable loans without that requirement. If a purchaser has poor credit or is otherwise not able to be eligible for a loan, the assumable mortgage might be the only way he could get his foot in the door.

See related