How Does Assuming a Mortgage Save a Person Money

By Dale Devries

To assume a mortgage simply means you assume the responsibility of that mortgage. You must agree to all the terms and the payment schedule of the mortgage, and you assume the liability of the debt. All mortgages are not assumable. All VA mortgages and most FHA mortgages are assumable, and most conventional mortgages are not. With the rising value of housing, if you were to assume a mortgage, you would most likely still have to get a new-purchase-money mortgage to cover the difference in what you are assuming and the sale price of the home. For example, a home was originally purchased for $60,000, and the owner still owes $40,000 on the mortgage. But the sale price is now $110,000. You can assume the $40,000 left on the mortgage but would have to get a new mortgage for the remaining $70,000.

VA loans are the most commonly assumed mortgages, and you do not have to be a veteran to assume these loans. Any VA mortgages made before March 1, 1988, are assumable without a credit check to the new buyer. In this case, both the buyer and the seller are liable if there is a default. Most sellers will not agree to this, and if the seller is a veteran, the remaining balance is taken from his eligibility amount to buy another home using a VA mortgage. For any mortgages made after that date, the buyer must qualify to assume the loan. The buyer must pay an assumption fee to both the lender and the VA. In this case, the seller is released from the liability of the loan.

All FHA mortgages made before December 1, 1986, can be assumed with no qualification of the buyer. These houses can be owner occupied or investment homes. Mortgages made between December 1, 1986, and December 14, 1989, can be assumed with a buyer credit approval, and they can also be owner occupied or investment. FHA mortgages made after December 14, 1989, can be assumed with the buyer completely qualifying for the loan. These assumed loans and new FHA loans are for owner-occupied homes only.

You will only save money if the original mortgage that you will assume has a lower interest rate than the current rate. Using the example above, if you had a $110,000 mortgage at 9 percent for 30 years, the monthly principle and interest payment would be $885.08, and you would pay $318,630 over the life of the loan. If you could assume the $40,000 at 5 percent and took out a new loan for $70,000 at 9 percent, your monthly payment would be $777.90 combined, saving you $107.18 per month. Over the life of the loan, you could save $38,564. The actual savings would depend on how long is left on the assumable mortgage. If there were only 20 years left to pay, then you would also save 10 years of payments on that mortgage, which would be an additional savings of $25,767.60. This example is simplified, but shows that you can indeed save money assuming a loan.

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