Assumption

Assumption is the practice of taking over an existing mortgage instead of applying for a new one. Just like auto leases can be assumed by a buyer (I'm sure you've seen those "take over my payments" classified ads), so too can a mortgage be assumed by the buyer. Most assumptions usually take place when interest rates are high after a period of low interest rates. For buyers, it's a way of "turning back the clock" and getting a mortgage at the low rates of a few years ago.

The biggest problem with assumption is that property values increase over time. In the past several years, many have seen their property values skyrocket. When a buyer assumes a mortgage, he or she must pay the difference between the amount remaining on the loan and the selling price of the house. At the rate things are going, that's almost certainly going to mean taking out a second mortgage to pay the balance.

Twenty or thirty years ago, most mortgages were assumable. Lenders were not in the practice of putting a clause specifically prohibiting assumption (called a Due-On-Sale Clause), and the courts ruled that they could do nothing to prevent buyers from assuming the original note. Of course, this was not good news for mortgage lenders. The money a buyer saves by taking over the mortgage comes directly out of the lender's pocket. As a result, most mortgage contracts now contain a Due-On-Sale Clause prohibiting future buyers from assuming the mortgage at the current rate.

Some lenders do explicitly offer assumable mortgages, but they come at an additional premium. As a home buyer in a period of low interest rates, it's an option to consider. If you expect interest rates to be significantly higher by the time you plan to sell your home, having an assumable mortgage may make it possible for more buyers to afford your home. It could (in theory, anyway) also allow you to price your home slightly higher. As always, you'll have to do the math to see if such a strategy will work for your particular situation.