Sometimes, real estate investors are presented with the option of assuming an existing mortgage. There are a number of factors to take into account if you are considering assuming an existing mortgage. For example, you may want to assume an existing first mortgage that has an excellent rate, but are concerned about taking on a second mortgage that has a much higher interest rate. (This is often the case with second mortgages, because, since second mortgages are lower in priority to first mortgages, lenders consider them to be riskier investments.) To determine whether this would be worthwhile, despite the high rate for the second mortgage, you would have to determine the average mortgage rate.

 

Here is an example of how you would do so if you needed to borrow $100,000. Let's say the first mortgage is $55,000 and has a mortgage rate of 4%. This is the mortgage that you are thinking about assuming. The second mortgage would have to be for $45,000. Let's assume that the rate would 8% to get this second mortgage.

 

Mortgage #1: $55,000 x 4% = $2,200

Mortgage #2: $45,000 x 8% = $3,600

Add $2,200 and $3,600 to get $5,800.

$100,000 x average mortgage rate = $5,800

Therefore, the average mortgage rate is $5,800 divided by $100,000 = 5.8%.

 

This means that you may want to assume the existing mortgage and get a second mortgage in the above scenario if the best rate you could get by borrowing the entire $100,000 through a new mortgage is greater than 5.8%. If borrowing the entire $100,000 through a new mortgage would be possible at a rate of less than 5.8%, you may be better off getting a new mortgage for the entire amount.

 

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