Selling Your Phoenix Home Subject To Your Existing Mortgage
When you are selling your Phoenix home subject to your existing mortgage, that means that the buyer is assuming your loan or taking over the responsibility of making the mortgage payments to pay off the loan. Any amount that is still owed on the mortgage is rolled into the final purchase price of your home. This type of sale is far more common when interest rates are high, but there can be other reasons that make this type of sale appealing to buyers. The greatest motivation is still to save on the interest rate of your mortgage. For example, the seller’s mortgage is charging 5% interest and the current interest rate is at 7%. So this process saves the buyer 2%. Buyers like to get a deal and save money even when it means getting a little creative on the purchase process.
The Benefits of Selling Subject to Your Existing Mortgage
Many sellers can’t imagine a reason to sell their home without paying off their mortgage. But with interest rates on the high side that could mean that a seller is waiting a very long time to sell his or her home. Rather than continuing to pay the mortgage and all of the other costs associated with ownership of the home, many sellers are willing to work with buyers on these more creative types of sales.
Another reason that a seller could elect to sell subject to the existing mortgage is in the event that a potential buyer cannot secure a mortgage due to credit issues. Using this less than traditional real estate sales process is a better option than the loss of an interested buyer. All of these challenges that the seller eliminates by offering the home for sale subject to the existing mortgage broadens the pool of buyers, who might make the purchase.
The Three Types of Subject to the Existing Mortgage Transactions
Option one is straight subject to with carry-back from the seller. The common term for this is seller financing. This can also be set up as a lease option or a land contract. In most of these cases, the buyer ends up with two mortgages, the one being passed along by the seller and one that is obtained by the buyer to cover the down payment or equity in the property. As an example, a house is being sold for $200,000 and the seller’s mortgage has a balance due of $100,000 which is financed at a rate of 5%. The buyer would assume the seller’s mortgage of $100,000 and would obtain their own mortgage of $100,000 at 7% interest to meet the sale price of the $200,000. The buyer would enjoy a 2% savings on the $100,00 loan being passed on by the seller making it beneficial to the buyer. The buyer would then be responsible for making two mortgage payments each month. One payment would go to the seller’s mortgage, and one would go to the buyer’s new mortgage.
Option two is straight subject to cash to loan. This is the most common type of subject to the existing mortgage loan. In this transaction, the buyer pays the seller the cash difference between the current loan balance and the asking price of the home. In a sense, the selling is getting cash for the equity in the home.
Option three is called wrap around subject to, and the seller receives an interest override because he or she earns money from the balance on the mortgage. If the existing mortgage is $200,000 with an interest rate of 5%, the seller’s carry-back would be $200,000 less any down payment. For example, assume the buyer put down 10%, or $20,000. The seller would earn 1% on the existing mortgage and 6% on any amount above that not covered by the down payment. For interest purposes, the buyer would pay 6% on the home’s value less the down payment.
The Down Side of Buying or Selling A Phoenix Home Subject to the Existing Mortgage
As demonstrated by the descriptions and examples above, buying or selling a home subject to the existing mortgage can be complicated and somewhat challenging if you are not familiar with the process. There are federal and state regulations which must be followed, and both the buyer and seller must agree to all the terms of the sale. Any terms which are vague or unclear at the time of closing can lead to disputes over who is the legal owner of the property. It is also possible for some lenders to call the loan due upon sale when the house changes hand, but this is a very, very rare event. Most lenders are happy to allow the transfer as long as the payments continue to be made on time.
All of the issues and complications surrounding a transaction subject to the existing mortgage can be avoided by choosing to work with a knowledgeable real estate professional, escrow officer or real estate agent. Higher Offer is a Phoenix real estate investment firm with vast expertise in all aspects of traditional and non-traditional real estate sales in Phoenix. We are interested in making all-cash offers to any homeowner who wants to sell his or her home quickly, at a fair price and in a hassle-free and stress-free manner.