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Friday, April 14, 2006

Assumable mortgage

A loan that allows a home buyer to take over a seller's mortgage when purchasing a home

Assumable mortgages require the lender's approval. When you assume a mortgage you inherit both its interest rate and monthly payment schedule. It can mean big savings if the interest rate on the existing mortgage is lower than the current rate on new loans - the lender, though, can change the loan's terms. You will still need to qualify for the loan and you have to pay closing fees, including the costs of the appraisal and title insurance.

The lender also holds the seller liable for the loan. For example, if you default and the lender forecloses, but the property sells for less than the loan' s balance, the lender can sue the seller for the difference.

Scenario #1:
Smith wants to sell his home for $95,000 and has an assumable $90,000 loan at 7% interest. Brown wants to buy Smith' s house. Brown only has to put down $5,000 (plus closing fees) to take over Smith' s house and mortgage.

Scenario #2:
Jones got an assumable loan 15 years ago for $80,000 at 6.5% interest. The loan balance today is $70,000. White wants to assume the property, which is now worth $160,000. White must raise $90,000 (plus money for closing costs) to close the deal.

See: Acceleration clause
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