Advantages

• One advantage to the home buyer in assuming a mortgage is bypassing the settlement, or closing, costs common on new home loans. Lower interest rates are one of the main reasons buyers assume existing mortgages. Advantages to the seller include relief from the financial responsibility of the mortgage, and, in some cases, earning a reasonable return on an investment. The bank or lending institution may find it advantageous to approve the mortgage assumption so that they too can bypass the cost incurred with writing a new loan.
  
  

Disadvantages

• A disadvantage for the buyer in assuming a mortgage is that they may have to contract a second mortgage to meet the sale price of the home, because the seller generally asks a higher price in order to garner some return of equity they may have built into the home. However, if the buyer can pay cash for the remaining balance between the asking price and the assumed mortgage balance, an assumption may be a good deal.
  
  

Due-On-Sale Clause

• If current interest rates are on the rise and a home buyer assumes the mortgage of the seller, the lender loses potential earnings from the increased interest to be earned on new loans written under terms with higher rates. Most mortgages, other than government-backed home loans, contain what is known as a due-on-sale clause. This provision in the mortgage agreement stipulates that the balance in full is to be repaid if the home is sold. This allows the lender the opportunity to increase the interest rate to reflect current market conditions and thus cash in on additional future earnings.
  
  

Contract Terms

• Mortgage contracts can be tedious reading. However, should all parties agree that a mortgage assumption is the best way to go in a home sale, it is absolutely essential that the buyer read the contract carefully. Knowing the interest rate structure -- whether it will remain the same throughout the life of the loan, or only for a short period of time -- as well as understanding clearly all obligations the agreement demands, can go a long way in preventing future financial catastrophe.