Assumable Mortgage
Your house has a mortgage on it. You paid $200,000, borrowed $600,000, and are now selling the house for a cool million bucks. The $600,000 mortgage you have on your home was raised in an era with extremely low interest rates. In your case, just 4.5%. The buyer coming along, paying a million bucks for your house, in most states, has the legal right to assume your mortgage.
That is, as long as they agree to live by the same terms that you lived by, they can take over your mortgage and adopt it as one of their own. In the case where the buyer has $400,000 lying around, they can literally be done with the purchase after assuming your loan because their $400,000 will comprise the down payment.
Why would anyone want to assume a mortgage? Because the current mortgage environment has a cost structure much higher than the mortgage they want to assume. For example, the new environment might be charging 7% for a similar loan, and in the buyer's ability to assume the mortgage at 4.5%, they're saving 2.5% per year in rent costs on that $600,000, or something near $15,000 per year in interest cost savings, albeit pre-tax.
Related or Semi-related Video
Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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