Mortgage Assumption vs. Refinancing: Which Is Better When Selling a Home?
Understanding Your Mortgage Transfer Options
If you're selling a home with a mortgage, you have two primary options to help the buyer: mortgage assumption or refinancing. But which one makes the most financial sense?
Choosing between these options can significantly impact both you and the buyer. This guide will break down the key differences, pros and cons, and financial impact of each, helping you make the best decision when selling a home with an existing loan.
1. What Is Mortgage Assumption?
How It Works
Mortgage assumption allows a homebuyer to take over your existing mortgage at the same terms, including the interest rate and remaining balance.
When It’s a Good Option
- Your mortgage interest rate is lower than current market rates.
- You have an assumable loan (FHA, VA, or USDA loan).
- The buyer qualifies with the lender for the assumption.
Pros of Mortgage Assumption
✔ Buyer secures a lower interest rate if your loan has better terms than today’s market.
✔ Closing costs are typically lower than refinancing.
✔ Seller may attract more buyers since the assumed loan can be a financial advantage.
Cons of Mortgage Assumption
❌ Only certain loans allow mortgage assumption (most conventional loans do not).
❌ The buyer must qualify with the lender’s credit and income requirements.
❌ Some lenders charge assumption fees, typically between 0.5% - 1% of the loan balance.
Example: If your existing FHA loan has a 3.5% fixed rate, but today’s market rate is 6.5%, a buyer assuming your mortgage could save tens of thousands in interest over time.
2. What Is Refinancing?
How It Works
Refinancing is when the buyer gets a new mortgage to pay off your existing mortgage, effectively replacing it with a fresh loan.
When It’s a Good Option
- Your current mortgage is NOT assumable (e.g., a conventional loan with a due-on-sale clause).
- The buyer can qualify for a better rate through a new loan.
- The seller wants to be fully released from any liability.
Pros of Refinancing
✔ The seller is completely removed from the loan (no risk of liability).
✔ The buyer can shop for the best mortgage terms that fit their needs.
✔ No assumption fees—just standard refinancing closing costs.
Cons of Refinancing
❌ Closing costs are higher, typically 2-5% of the loan amount.
❌ The buyer must secure new financing, which takes time.
❌ If mortgage rates are high, the buyer might pay more interest over time.
Example: If a buyer refinances at a 6.5% interest rate while an assumable loan was at 3.5%, they could pay significantly more in total interest over 30 years.
3. Mortgage Assumption vs. Refinancing: Cost Comparison
| Factor | Mortgage Assumption | Refinancing |
|---|---|---|
| Interest Rate | Keeps existing rate | New market rate |
| Closing Costs | Lower (1-2%) | Higher (2-5%) |
| Buyer Approval | Needs lender approval | Needs full mortgage approval |
| Seller Liability | May remain on loan if not fully released | Completely removed from loan |
| Loan Types Allowed | FHA, VA, USDA | Any loan type |
Key Takeaway: Mortgage assumption is cheaper for buyers if interest rates are high, while refinancing fully removes seller liability and provides flexibility for the buyer.
4. How to Choose the Right Option When Selling
Mortgage Assumption Is Best If:
- Your loan is assumable (FHA, VA, or USDA).
- You want to attract buyers with a lower mortgage rate.
- You don’t mind waiting for lender approval for the buyer.
Refinancing Is Best If:
- Your loan is NOT assumable (conventional loans with a due-on-sale clause).
- The buyer can secure a competitive mortgage rate.
- You want to be fully released from the mortgage.
Pro Tip: Ask your lender if they offer a partial assumption—where part of the loan is assumed and part is refinanced to give buyers flexibility.
Final Thoughts: Which Option Is Right for You?
If your loan is assumable, mortgage assumption can help attract buyers while saving them money on interest. However, if your mortgage has a due-on-sale clause, refinancing is often the only option. Carefully compare both choices to see which best fits your situation.
