Never Make an Assumption, Unless It's a Mortgage Assumption

What is a mortgage assumption?

A mortgage assumption is when you sell your home to a buyer and transfer the terms of your existing mortgage to them as well. In a falling rate environment, few people will opt for a mortgage assumption, since applying for a new mortgage often means getting a better rate.

However, now that rates have shot up in the past few years many homeowners are holding onto 2% mortgage rates that are no longer being offered by lenders. Savvy homeowners looking to sell their property can treat their mortgage as an asset, one that could fetch you an even higher selling price.

The majority of lenders in the U.S. and Canada allow for a mortgage assumption, but you should always confirm with your lender to make sure you’re eligible. If you’re selling a property, you can discuss with your real estate agent the potential benefits of including a mortgage assumption in your listing. 

If you’re buying a property, ask the seller about the possibility of assuming their mortgage. If they locked into a fixed mortgage rate in 2021 or early 2022, before rates increased significantly, and their lender allows the transfer, you could end up saving thousands of dollars in interest. If you’re working with a real estate agent, they can help you with getting the required information from the seller.

Is it worth getting a mortgage assumption? How do I calculate the value of a mortgage assumption?

In deciding whether to assume a mortgage, it comes down to evaluating the benefit to the seller and the buyer to determine what it should be worth and how it impacts the sale price.

• If you are selling a property, a mortgage assumption enables you to minimize the lender penalty fees you would be charged to break your mortgage.
• As a home buyer, the value to you is both the immediate cash flow benefit of having a lower mortgage payment, as well as the interest savings from a lower rate. You can enter your assumed mortgage rate to compare and see what the savings would be relative to applying for a new mortgage yourself.

Once you’ve calculated this, the impact on the sale price should then be: Expected Sale Price - Value to Seller + Value to Buyer. You could include this extra value in the listing or during negotiations to get a higher selling price for your property.

What are the pros and cons of a mortgage assumption?

Naturally, everything comes with a trade-off. Let’s break down why a mortgage assumption could be beneficial and the potential downsides you need to consider.

The benefits of a mortgage assumption

• As a seller, you’ll save on lender penalty fees. In having someone assume your mortgage, you don’t have to pay fees to break your current mortgage.
• As a seller, you’ll likely command a higher sale price. Assuming the mortgage rate is low enough to be valuable, a buyer should be willing to pay more for that property if it comes with the mortgage. If it’s the seller’s principal residence, those extra funds on the sale may also be tax free, depending on whether you’re in Canada or the U.S., how long you have owned the property prior to selling and your income tax bracket.
• As a buyer, you could lower your monthly payments. This depends on the remaining amortization on the mortgage, but in today’s market environment assumed mortgage rates can be significantly lower than current market rates.
• As a buyer, you could reduce the overall amount paid on interest. Having a lower mortgage rate can save you a huge amount of interest over the term of that mortgage.

The downsides of a mortgage assumption:

• As a seller, you’ll have to share the details of your mortgage with potential buyers, which may make some people uncomfortable.
• The buyer needs to be able to qualify for the seller’s mortgage. Typically, you will qualify for less than you otherwise would on a new mortgage, largely because the seller’s mortgage will have a lower amortization. It’s highly recommended that the buyer ensures they have financing already lined up as a contingency if the mortgage assumption doesn’t get approved.

In summary: The ideal scenario for a mortgage assumption would be that the buyer requires a mortgage that is equal to or less than the seller’s mortgage.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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