Loan Assumption vs Refinancing: Pros, Cons, and Key Differences Explained

Mortgages might seem like a pretty straightforward option when you're dreaming about owning your own place. But once you get those keys and start making those monthly payments, reality hits hard. Things can get a bit tough on the bank account.

When those payments start to feel like a mountain, you've got two popular options to ease the load – refinancing and loan assumption. Each comes with its own pros and cons, and the right choice really depends on your situation. Today, I’m going to break down what each option means, along with their pros and cons so you can make the best choice.

What is Loan Assumption?

Loan assumption is when a new borrower takes over an existing mortgage from the current homeowner. For that, you’ve to list your home for sale, if you’re the homeowner.

Here’s how it works – Instead of taking out a new loan, the new borrower assumes the responsibility for the existing loan, including its terms, interest rate, and balance. However, not all mortgages are eligible for loan assumption except FHA, VA, and USDA loans.

What is Refinancing?

Refinancing, on the other hand, helps you change the terms of your current mortgage and get into a new mortgage with improved terms mostly for affordable interest rates and monthly payments.

You can also consider switching from an adjustable-rate mortgage to a fixed-rate mortgage or vice versa.

Differences Between Loan Assumption Vs. Refinancing

Loan assumption vs. refinancing – each option has its own advantages and considerations. Understanding their differences is crucial before deciding which one best fits your financial goals.

Loan Assumption	Refinancing
The existing borrower transfers the mortgage to a new borrower, who assumes responsibility for the loan and continues making payments under the original terms.	The existing mortgage is paid off with a new loan that may have entirely different terms.
The lender assesses the creditworthiness of the new borrower to ensure they can handle the mortgage payments.	The lender evaluates the current homeowner's credit score, income stability, and debt-to-income ratio to determine eligibility for refinancing.
Loan assumption involves less paperwork and processing time, allowing for quicker completion of the transfer.	Refinancing involves fees such as loan origination, appraisal, title search, and other closing costs.
The new borrower must accept the existing terms without the ability to negotiate changes.	Homeowners can negotiate new terms with the lender, potentially securing lower interest rates or extending/reducing the loan term.

Pros and Cons of Loan Assumption

If loan assumption seems like an appealing option to you, perhaps you're selling your house and moving to a different city or deciding to rent elsewhere. You might want to consider weighing the pros and cons before finalizing your decision.

Pros:

• Lower Closing Costs:

  Loan assumption generally has lower closing costs compared to refinancing, as it involves less paperwork and processing.

• Avoiding Higher Interest Rates:
  If current interest rates are higher than your existing mortgage rate, assuming the loan can help you keep the lower rate.
• Speed:

  Loan assumption can be quicker than refinancing, as it doesn’t require as much paperwork or processing time.

Cons:

• Limited Loan Terms :

  You're stuck with the existing loan terms, including interest rate and loan duration, which may not be as favorable as current market rates.

• Creditworthiness Requirement :

  The new borrower must qualify with the lender, which can be challenging if their credit score or financial situation isn’t strong.

• Seller Liability:

  The original borrower (seller) might still be liable for the mortgage if the new borrower defaults until a release request has been approved by the lender.

Loan Assumption Vs. Refinancing During a Divorce

During a divorce, managing a mortgage is one of the challenging tasks, especially when deciding who will move out of the residence and who will take over the mortgage payments. In such situations, here's how loan assumption and refinancing stack up:

• Loan Assumption

  If one spouse wants to keep the home, they may opt to assume the existing mortgage. This allows them to avoid the complexities and costs of refinancing. Plus the spouse who’s taking over the mortgage keeps the same terms as the original mortgage.

• Refinancing

  Choosing the best mortgage refinance offer can provide a clean break by paying off the existing mortgage and establishing new terms solely in the name of the spouse keeping the home. This can also help in removing financial ties between the divorcing parties.

Wrap-Up

To sum it all up, both loan assumption and refinancing serve as good options, considering the different situations of every borrower. Loan assumption is good if you're happy with your current mortgage and want to skip extra costs.

Refinancing gives you more room to change terms and possibly save money. If you're going through a divorce, think about which option fits your future plans. It’s smart to talk to a loan officer first before you draw a conclusion to make sure that you see your choices clearly without any confusion.