Don't Assume You Want the Mortgage

By PAMELA YIP
Copyright 1997 Houston Chronicle

After all that searching, you've finally found your dream home at the right price.

What's even better, the seller says the mortgage is assumable.

Should you go for it? Not so fast.

It seems so simple: When you assume a mortgage, you take on the mortgage payments of the former homeowner.

This isn't the kind of interest-rate market that makes these kinds of loans attractive. This option is attractive when interest rates are high. Back when mortgages carried double-digit rates, the chance to assume a mortgage with an affordable interest rate was really worth something.

But given today's relatively low, stable interest rates, the rate you assume could be close to what's available from the bank.

"There is no advantage to assuming a loan anymore because interest rates are down so much," said Bob Kerlin, a mortgage broker in Fairfax, Va., and mortgage adviser to the United Homeowners Association, a consumer group. "There are very few people who assume loans anymore."

Average interest rates on 30-year, fixed-rate mortgages fell last week to the lowest level since February, according to the Federal Home Loan Mortgage Corp.

The average fell from 7.85 percent the previous week to 7.72 percent, the lowest rate since the week ended Feb. 27.

The allure of assuming a mortgage also has been reduced by lenders' first-time buyer programs that allow borrowers to put down as little as 3 percent.

"There are so many opportunities that a home buyer can make that they typically don't necessarily want to limit themselves," said Gary Garrett, chief lending officer at Coastal Banc.

Lenders lost money

During the 1980s, lenders who had made fixed-rate loans got burned when market rates rose sky-high. The fact these loans are assumable forced them to endure these losses even longer as the loans were assumed by home buyers.

As a result, lenders and other mortgage-related organizations made it harder to assume fixed-rate loans.

"Anyone who did fixed-rate loans realized they had to change the way fixed-rate loans were structured," Garrett said. "They changed it so that the fixed-rate loan document precluded an assumption."

The other thing to watch out for is assuming a mortgage when the value of the home you're buying exceeds what's owed on the mortgage. In that case, you'll have to pay the difference or take out a second loan.

For example, if you're buying a $150,000 house and you assume a $100,000 mortgage, you'll have to pay $50,000 to the seller to pay off the difference. You're really buying out the equity that's built up.

"The down payment could be larger under an assumable mortgage," said Donna McAda, manager of mortgage outreach at Texas Commerce Bank. "You want to look at what benefit it would be to assume that mortgage."

Many adjustable-rate mortgages are assumable, but you've got to make sure you're not going to get caught in a trap.

These mortgages typically have an initial teaser rate, which means nearly automatic rate increases in the early years of the loan.

If you assume the loan after the initial teaser rate period has lapsed and market rates have gone up, you've lost the benefit of that low rate.

Good rates are out there

Having said all this, I must add there are some loans worth assuming.

"There are lots of loans that were originally written at 6 or 7 percent," said Rick Pischalski, vice president at Bank United. "You just have to look at what the underlying mortgage rate was and figure it out from there."

If it turns out to be a good opportunity to assume a mortgage, take some steps to protect yourself against any surprises.

Lenders typically have to consent to a mortgage being assumed. Ask the seller for a letter from the lender stating that the financial institution has given its OK for you to assume the loan, presuming that you qualify for the loan.

"The big issues are to make sure you know the status of the loan and make sure there's no current default," said Kent Newsome, a partner and real estate attorney at Fulbright & Jaworski in Houston. "If they haven't paid that mortgage for a couple of months and you're assuming that mortgage, you could get hit with a big bill right off the bat."

Ask the seller to get from the lender a "payoff statement" that shows the loan's current balance, when the last payment was made and if there are any past due payments.

The alternative is to get from the seller the most recent monthly statement from the lender, Newsome said.

"You've got to know what you're assuming," he said.

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