Real Estate Loans: Wrap Around Mortgages

A wrap-around mortgage is something that borrowers may want to consider when trying to obtain a loan. This works by giving the borrower a great interest rate for the first mortgage and then a second is taken out. These two are combined into the one with the lower interest rate.

Defining the Wrap-Around Mortgage

n simple terms, a wrap-around mortgage is one where the lender takes on the responsibility for an already existing mortgage. One example of this is Brian who has a $70,000 mortgage but manages to sell his house to James for $100,000. James makes a down payment of $5,000 and has to borrow $95,000. This one essentially “wraps-around” the old one because the new lender makes payments on the old mortgage.

Lenders like this type of mortgage because they can get a better deal for themselves. The older mortgage of $70,000 can have an interest rate of 6%. The new one has 8%. He has a difference of $25,000 between the two where he earns 8% now. He will also get the difference between the two rates on the old mortgage. The $25,000 difference essentially has a total interest rate of 13.5% now which he can’t charge to borrowers obviously so he gets it through this method instead.

The lender for this is usually the seller due to the profit obtained. It’s one way that a seller finances a mortgage for a buyer. Another is a second mortgage. Like in the previous example, James might get $70,000 from a bank while getting the remaining $25,000 from Brian, the seller. The wrap-around mortgage doesn’t repay the original while a second mortgage does.

The only loans that can be wrapped are assumable. This means the loan can be transferred to people who qualify to buy the home. The only two types that can do this without lender permission are VA and FHA. Most fixed-rate loans require that the mortgage must be paid in full if the house is sold. These terms and conditions make it impossible for the home owner to have a second mortgage for the seller unless the lender permits, and this will be at the current market rate.

Explaining Wrap-Around Mortgages

Wrap-Around Mortgages are a way for the seller and borrower to agree on how much the home is going to be sold for and then the buyer pays the difference of the current mortgage and equity to the home seller. The buyer then repays the original mortgage.

Negotiations with the Wrap-Around Mortgage

The negotiations with these loans occur by the new party getting added to the loan. The contract is modified with some new terms and the interest rate is applied while the loan continues under the new buyer. The seller is no longer required to pay the balance since the buyer now does and it makes buying and selling easier for both parties.

Approving the Wrap-Around Mortgage

The wrap around mortgages requires an agreement to be made between seller and buyer and approval ultimately from the lender. The seller benefits by getting out of his loan agreement and the buyer likes them because it reduces the costs that are incurred from obtaining a new mortgage because they are cheaper. The buyer needs to be able to give the seller the right amount that was agreed to beforehand.

Availability of Wrap-Around mortgages

Some states do not allow wrap-around mortgages to occur. If you’re considering this, check with the seller to be sure that it is possible and take a look at the current terms that are on the mortgage currently. These terms should be evaluated by both buyer and seller. These help to determine if the wrap-around mortgage is the best financial decision.

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