Assumed mortgage is a type of the mortgage that allows the borrower in transferring the unpaid loan obligation to another person by selling the mortgaged property without the inclusion of any prepayment penalty. The concept behind the assumed mortgage is that the buyer assumes that the obligation associated with the mortgage to be his or her own. The lower rate of interest of the assumed mortgage is actually the prime reason that makes people to go for it. The method of assumed mortgage is often used in the cases when the buyer is not getting a better rate of interest in the market than what the seller is currently having.
When a house buyer assumes the obligation of the mortgage of the home seller, technically the buyer actually assumes the entire mortgage of the seller. Apart from offering the loan in lower interest rate, another advantage of the assumed mortgage is that the borrower can avoid the settlement cost of the new mortgage. If the market interest rate is low, the rate of interest of the assumed mortgage is really low but it can grow up if the market rate is increased. The assumption mortgage value is dependent on the various factors like:
- The period and balance that is the remaining of the old loan
- The new loan term
- The difference of interest rate between the new and old assumed mortgage
- The investment rate
- On the time period for how long the buyer wishes to have the particular mortgage
In cases of the assumed mortgage, the buyers never get the full assumption value because the seller should also be benefited from the deal. In the assumed mortgage, the savings is shared between the two parties. According to some economists, the house price should reflect the full value of the assumption. The benefit earned by the seller and buyer from an assuming mortgage actually comes at the lender's expense.