An assumable mortgage is a loan that can be transferred to another person without changing the terms (such as the interest rate) of the original mortgage. You may have never heard of an assumable mortgage until now. But if you locate a home for purchase with an assumable mortgage in Edmonton, it can be a good deal for both buyer and seller.
Your Edmonton mortgage broker will explain that there is a risk to the seller if the buyer should default on the loan, as the loan is still technically the seller’s responsibility. Thankfully, though, the Canada Home and Housing Corporation (CMHC) has now stated that if the buyer of an assumable mortgage keeps up payments for a continuous twelve months (one full year), the seller is no longer responsible should the new owner default.
What is so great about an assumable mortgage?
There are a couple of reasons why buyers sometimes jump at assumable mortgage loans when searching for a home. One reason is that these loans are more quickly approved by banks than a brand new loan would be. Also the closing costs are much lower with an assumable loan. You are not starting the loan from scratch, with multiple types of settlement costs, as the loan is basically already in place.
Another advantage of assumable mortgages will be quite apparent as mortgage interest rates rise. If you purchase your home now, when rates are historically low at less than 3%, your monthly payments will be lower than if you’d bought when rates were 12% or more in the 1990s. If you obtain a mortgage now that allows for future assumption by another party, it may very well work in your favor in the future. When you are ready to sell in years to come, rates could possibly have risen quite high once again. If your mortgage is assumable at the low rates you bargain for now, buyers will be flocking around, ready to scoop up your property and the low mortgage rates that will come with your assumable mortgage.
Perhaps your home is worth $350,000 with an assumable mortgage balance of $300,000. If a buyer has $50,000 in cash, he may want to opt to give you the $50,000 and take over the balance of your mortgage instead of getting his own loan. He would pay $50,000 directly to you, and assume the $300,000 mortgage remaining. Payments would be made directly to the bank, just as you did, but now the buyer owns the home and the bank deals directly with him.
The mortgage company or bank must approve the mortgage transfer as well as the buyer himself. Many fixed rate mortgages can be assumed. If you take out a variable rate mortgage or HELOC, it cannot be assumable. Sellers are also helped by avoiding any prepayment penalties on their loans when a buyer assumes their mortgage.
Get in touch with MyMortgageBroker.com’s professionals by calling us today at 403-870-2669 for more information on assumable mortgages.