The terms of my new mortgage include a ‘due on sale’ clause. My broker says this is an acceleration clause. But I thought acceleration clauses were about foreclosure. What is going on?
Don’t worry! ‘Due on Sale’ clauses are a typical part of a standard mortgage. All it means is that if you sell the house, you have to use the proceeds of the sale to pay off the existing mortgage. You probably figured you had to do that anyway.
You are correct that accelerating a mortgage sometimes has bad implications. If a mortgage holder misses payments, the lender can accelerate the mortgage, meaning the lender calls the loan, demanding immediate payment or foreclosure.
Some mortgages do not have a ‘due on sale’ clause. These mortgages are called assumable mortgages because they can be transferred from one person to another. Loans from the VA, USDA and FHA are assumable mortgages. They can be useful in some situations, but bear in mind, not just anyone can assume a mortgage, they still have to qualify.
Here is an example where an assumable mortgage could be useful: Let’s say that a homeowner took out a mortgage when interest rates were low. Ten years later, suppose interest rates had doubled. The homeowner with the lower mortgage rate would be able to transfer the mortgage to someone at that lower rate. The new mortgage holder would get a low-interest rate and wouldn’t have to come up with closing costs. But typically, the new mortgage holder would still have to come up with money to match the agreed-upon equity in the house. In any case, this is a situation that doesn’t come up very often in this era of low interest rates. Today, assumable mortgages are transferred to others in more extraordinary cases of death or divorce. Call us if you have questions about this or any other real estate matter? Thanks.
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