Should You Take Over a Mortgage Instead of Applying for a New One?

The process of purchasing a house includes applying for a new home loan with a financial institution. However, you can obtain a mortgage in certain circumstances without starting from square one.

This is made possible through an assumable mortgage, which lets borrowers take over the existing mortgage on the purchased property. The responsibility of the debt gets transferred to the new buyer, which means the seller is no longer liable for the loan. 

The question is, is taking over a mortgage better than taking out a new loan? While assumable mortgages seem attractive, only select mortgages are eligible for this type of loan, and they come with a few drawbacks.

What is an Assumable Mortgage?

An assumable mortgage is a type of loan that lets an individual find a home they want to purchase and take over the seller’s existing mortgage without applying for a new home loan. This means the buyer assumes the rate, repayment period, current principal balance, and other terms of the seller’s existing mortgage.

When you assume a mortgage, you become liable for funding the difference between the remaining mortgage balance and the property’s current value.

Keep in mind that when you assume a mortgage, you take over the seller’s remaining loan balance. In many instances, it won’t cover the property's full purchase price, so you’ll still have to put money down to make the difference.

Contact our mortgage experts for inquiries if you want to discuss your mortgage options in Michigan.

What are the Downsides to Assuming a Mortgage?

While assuming a mortgage might seem tempting, particularly if it has a low-interest rate, applying for a new home loan might be more beneficial. Let’s take a closer look at the cons of assumable mortgages.

Large Down Payment Requirement

The main disadvantage of assuming a mortgage is that you might be required to put more money down than you would if you applied for a new mortgage.

One of the reasons for this is that if the seller has owned the property for a long time, they could have a lot of built-up equity, and you would have to compensate the seller for that equity. Even if the seller doesn’t have built-up equity, you would still be required to pay upfront for any appreciation in the house’s value.

Only Available on Certain Loans

This type of loan is only available in the case of certain loans subsidized by the government. Government-backed loans come with limitations that are nonexistent in conventional loans. 

The Bottom Line

In situations where the homeowner has a lot of equity in their property, you might be required to pay a substantial down payment or take out a new mortgage for the difference between the sale price and the existing loan.

Plus, only certain loans are assumable; if the cons outweigh the benefits, applying for a new home loan is the better option for homeownership.

Ready to buy your first home? Work with Reliance Financial Group today!

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.