Ok I know what assumption of mortgage in general means but this other topic on assumption of mortgage in dean's book really confused me.
So here it is, the whole topic from the book:
"Be A Real Estate Millionaire"
Chapter 14 "Buying Real Estate With No money Down"
Assumption of mortgage with seller-carried second and bonus:
Next to using seller financing, assuming a mortgage is probably the most cost-effective way to own property because you pay no loan costs as part of the transaction. Let's say you found a property with an assumable first mortgage, but you have little or no cash available for the down payment or closing costs. You can assume the first mortgage (meaning you take over payments on the existing mortgage or promissory note) and nogotiate with the seller to take out a second mortgage for their equity in the property, as explained in the previous section, "Seller-carried second mortgage."
As an enticement to the seller to accept your offer, you can agree to pay an additional amount of interest over and above what the seller is currently paying on the first mortgage, as well as nogotiating the second mortgage interest rate to accommodate the seller's needs.
For example, suppose a seller has a property with a value of $140,000. The property has an existing first mortgage in the amount of $102,000at 6% interest with a monthly payment of $612 that you can assume.
When you nogotiate the purchase, you would ask the seller to carry a second mortgage in the amount of 8% (interest only) and agree to pay the seller an additional amount of 1% of his or her first mortgage (for the same time period of the second mortgage) as a bonus for carrying the second mortgage, because it is an incentive to the seller to get creative with the financing. The benefits to the seller are as follows:
$38,000 second mortgage at 8% / $253 monthly
$102,000 at 1% (bonus) / $85 monthly
$102,000 assumption / $612 monthly
Total payment / $950 monthly
The effective rate on this type of financing technique for the second mortgage becomes 10.68%. An easier way to accomplish this loan would be to just write the second mortgage for the higher interest rate. Incidentally, all the mortgages and the bonus you are paying go away when you refinance the property.
Now I did not understand the whole point of this topic. If someone can simplify this for me in the simplest way possible, then that would be great. Thanks in advance.
"Open minds backed by knowledge, wisdom, persistence, and determination equals unstoppable excellence"