What is an assumable mortgage?

The housing market is still hot right now, but it’s not very buyer-friendly. People who want to become first-time homeowners or relocate to a new city are finding themselves faced with high interest rates and fewer available homes . If you’re hoping to buy a home without spending more than you can afford, you could consider looking for a home that comes with an assumable mortgage.

When you buy a home with an assumable mortgage, you literally take over the previous homeowner’s mortgage loan. This includes the interest rate associated with the mortgage, which could be lower than what the current housing market is offering.

Many homeowners don’t realize that taking over someone else’s mortgage is an option. We asked Adie Kriegstein, a Licensed Real Estate Salesperson and founder of the NYC Experience Team at Compass, to explain how assumable mortgages work.

What is an assumable mortgage?

An assumable mortgage allows you to finance a home by assuming the previous homeowner’s mortgage. In a housing market with ever-rising interest rates, that could be a smart financial move.

“An assumable mortgage allows a buyer to take over the seller’s existing mortgage,” Kriegstein explains. “In an assumable mortgage, the buyer assumes responsibility for the remaining balance and terms of the mortgage, including interest rate and repayment schedule.”

Not all mortgages are assumable, but certain types of government-backed mortgage loans, including FHA loans, may qualify as assumable mortgages. “Ultimately, whether or not an assumable mortgage is right for you depends on your individual circumstances,” Kriegstein says. “It’s important to do your research and compare your options carefully and consider seeking advice from a mortgage lender or financial planner.”

Keep reading for the pros and cons of an assumable mortgage.

What are the advantages of an assumable mortgage?

If you’re considering an assumable mortgage, it’s important to understand how it could benefit you financially. Whether you’re hoping for low interest rates or the ability to buy a home without making a down payment, an adjustable mortgage could be just what you’re looking for.

“An assumable mortgage can be advantageous in a few different scenarios,” says Kriegstein. For example, if interest rates have risen since the seller took out their mortgage, assuming their loan could mean getting a lower rate than you would with a new mortgage. Additionally, if the seller has built up equity in the home, the buyer may be able to take over the loan without needing to make a down payment.”

What are the disadvantages of an assumable mortgage?

While some homeowners may benefit from the financial advantages of an assumable mortgage, these agreements come with a few disadvantages as well.

“There are potential downsides to assumable mortgages,” Kriegstein told us. “Not all mortgages are assumable, so you may have a limited pool of homes to choose from if you’re looking specifically for an assumable mortgage. Additionally, assuming a mortgage means taking on the seller’s existing loan terms, which may not be ideal for your financial situation. For example, if the seller has a high interest rate or a balloon payment due soon, you could end up paying more in the long run than you would with a new mortgage.”

How do assumable mortgages compare to other types of mortgages?

Before you start househunting, it’s important to understand how assumable mortgages compare to other types of mortgage agreements, such as the classic fixed-rate mortgage and the newly popular adjustable-rate mortgage (ARM).

“Assumable mortgages can be a great option for some homebuyers, but it’s important to understand how they compare to other mortgage types,” Kriegstein explains. “Fixed-rate mortgages offer the security of a consistent interest rate over the life of the loan, which can be beneficial for those who want predictable monthly payments. Adjustable-rate mortgages, on the other hand, often start with a lower interest rate but can increase over time, making them riskier for borrowers who plan to stay in their homes long-term.”

Want to learn more? Read our complete guide to adjustable-rate mortgages, or check out our analysis of the pros and cons of Rocket Mortgage. And if you’re just getting started on the homebuying process, take a look at our tips on how to save money for a house.