=The Mortgage Money Guide= Page 9
Updated Edition from the Federal Trade Commission Creative Financing For Home Buyers

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Assumable Mortgage

An assumable mortgage is a mortgage that can be passed on to a new owner at the previous owner's interest rate. For example, suppose you're interested in a $75,000 home. You make a down payment of $25,000, and you still owe $50,000. The owner of the home has paid off $20,000 of a $30,000, 10% mortgage. You assume the present owner's mortgage, which has $10,000 outstanding. You also make additional financing arrangements for the remaining $40,000, for example, by borrowing that amount from a mortgage company at the current market rate of 12%. Your overall interest rate is lower than the market rate because part of the money you owe is being repaid at 10%.

During periods of high rates, most lending institutions are reluctant to permit assumptions, preferring to write a new mortgage at the market rate. Some buyers and sellers are still using assumable mortgages, however. This has recently resulted in many lenders calling in the loans under "due on sale" clauses. Because these clauses have increasingly been upheld in court, many mortgages are no longer legally assumable. Be especially careful, therefore, if you are considering a mortgage represented as "assumable." Read the contract carefully and consider having an attorney or other expert check to determine if the lender has the right to raise your rate in this mortgage.

Seller Take-back

This mortgage, provided by the seller, is frequently a "second trust" and is combined with an assumed mortgage. The second trust (or "second mortgage") provides financing in addition to the first assumed mortgage, using the same property as collateral. (In the event of default, the second mortgage is satisfied after the first). Seller take-backs frequently involve payments for interest only, with the principal due at maturity.

For example, suppose you want to buy a $150,000 home. The seller owes $70,000 on a 8% mortgage. You assume this mortgage and make a $30,000 down payment. You still need $50,000. So the seller gives you a second mortgage, or take-back, for $50,000 for 5 years at 10% (well below the market rate) with payments of $416.67. However, your payments are for interest only, and in 5 years you will have to pay $50,000. The seller take-back, in other words, may have enabled you to buy the home. But it may also have left you with a sizable balloon payment that must be paid off in the near future.

Some private sellers are also offering first trusts as take-backs. In this approach, the seller finances the major portion of the loan and takes back a mortgage on the property.

Another development now enables private sellers to provide this type of financing more frequently. Previously sellers offering take-backs were required to carry the loan to full term before obtaining their equity. However, now, if an institutional lender arranges the loan, uses standardized forms, and meets certain other requirements, the owner take-back can be sold immediately to Fannie Mae. This approach enables the seller to obtain equity promptly and avoid having to collect monthly payments.

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