Paying down mortgage debt is an option when you own a home, want to build up your equity in the property, and have the extra income to do so. By paying down your mortgage, you decrease the balance owed to your mortgage lender and increase the percentage of the property you own. The assumption of a mortgage usually occurs when you acquire new property. If the property has an existing mortgage, you can elect to have the property’s seller transfer his mortgage title and you assume responsibility for the remaining payments on the debt. There are advantages and disadvantages to paying down a mortgage or assuming a new mortgage.
Advantages of Reducing a Mortgage
Paying down your mortgage can build up the equity in your home and help you meet the loan-to-value requirements of the mortgage. If you sell the home in the future and property values have risen, you will receive more cash from the sale. Reducing a mortgage with extra payments lets you pay off the debt well in advance of the original loan period. Making additional mortgage payments will bring you closer to owning 100 percent of the property.
Disadvantages of Reducing a Mortgage
When you use cash to reduce a mortgage, you tie up your cash in an illiquid real estate asset. You usually receive this money back when the property is sold. However, the sale of a home can be a time consuming and complicated transaction that takes months to finalize. And there's always the chance you will have to sell it for much less than you originally hoped for. Cash used to reduce a mortgage is also cash that cannot be used to reduce higher-interest debt, used for investments that might pay a higher return, or used to build up your personal savings and retirement accounts. You also decrease the amount of mortgage interest available as a tax deduction.
Advantages of a Mortgage Assumption
Assumable mortgages tend to be FHA and VA loans. One of the main benefits of assuming a mortgage is the transfer to the buyer of favorable financing terms, such as a low-interest rate and a possibly shorter loan term. Buyers also pay a fee for assuming a mortgage that is much lower than the closing costs of a regular mortgage loan. Assuming a mortgage is also beneficial for buyers with lower credit scores or who don’t have money for a down payment.
Disadvantages of a Mortgage Assumption
Many buyers looking for a new home are not aware of the mortgage assumption option. If you assume a mortgage with a high interest rate, you might need to refinance the loan in the future if rates drop and you want to lower your interest payments. A loan refinance will incur closing costs and other fees. However, the biggest disadvantage of a mortgage assumption falls upon the seller, who can be liable for mortgage payments if the buyer doesn’t take legal responsibility for the loan.
- Thinkstock/Comstock/Getty Images
- Understanding Pay Down on Bonds & Financial Statements
- Is There Any Incentive to Pay a Mortgage Earlier?
- How to Cool Down a Bedroom
- How to Sell a House on a Land Contract While Still Paying the Mortgage
- How to Lower PMI
- What Loan Should I Get If I Don't Plan on Living in the House?
- How to Write a Letter Requesting Lease Negotiations
- The Best Ways to Pay Down Home Equity Mortgages With Balloon Payments at the End
- What Is Drive-By Appraisal?
- Turning Down an Offer Because It Involves Relocation