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 Wrap Around

Creative Real Estate Financing Technique #3

Wrap around mortgages can be and are a productive method to apply. 

Assume the following situation: A seller has a property with a fair market value (FMV) of $50,000 with an existing assumable mortgage of $30,000 at 8% interest with payments of $254 per month. The seller's equity is $20,000 ($50,000 less $30,000).

A conventional no money down way to buy the property would call the buyer to assume the first mortgage of $30,000. Next, the buyer would give the seller a second mortgage of the $20,000 balance at 10% interest with payments of $200 per month. The purchaser's total payment would be $445 per month ($245 + $200).

To avoid the cost and liability of assuming the existing mortgage, offer the seller a $50,000 wrap-around mortgage, also known in some areas as an all inclusive trust deed, payable at the rate of 10% interest with payments of $445 per month. On the surface, it appears to be the same proposition, but look at the actual effect.

A wrap around mortgage is a new mortgage which literally wraps around the old mortgage. By using a wrap-around mortgage, the buyer makes payments on the new mortgage directly to the seller, and the seller continues t make payments on the old mortgage. Since the payments on the new mortgage are larger than on the old mortgage, the seller keeps the difference.

In this example, you will pay the seller approximately $5,000 per year interest ($50,000 x 10%) on the wrap-around mortgage. The seller will pay approximately $2,400 per year interest ($30,000 x 8%) on the first mortgage. The seller will keep the difference, or $2,600 per year ($5,000 less $2,400). The seller's equity is $20,000, so the seller is actually netting approximately 13% ($2,600 divided by $20,000) on the transaction, and the first mortgage is being paid off at a faster rate than the wrap-around mortgage. Therefore, when the first mortgage is paid off in 15 years or so, the wrap-around mortgage will still have an unpaid balance of about $35,000. The seller's equity has effectively grown from $20,000 to $35,000 -a win/win situation.

Example Summary Technique #3

Wrap-Around Mortgage

 

What You Need To Begin:

Nothing

 

Summary Of Terms:

Fair market value

$  50,000

Assumable mortgage

$  30,000

Interest

         8%

Monthly payments       

$       245

Seller's equity

$  20,000

 

Procedures:

Offer a wrap-around mortgage at 10% interest


$  50,000

Yearly interest payment to seller           

$    5,000

Seller's first mortgage

$  30,000

At 8% interest, yearly interest payment to first mortgage holder


$    2,400

Amount of interest seller earns per year

$    2,600

 

Results:    

 

  • The seller earns $2,600 in interest per year for a 13% return on his $20,000 equity.
  • The first mortgage is paid off in 15 years.
  • The seller's equity in the mortgage has grown from $20,000 to $35,000
  • Buyer, no money down deal is made
  • The cost and liability of assuming the first mortgage is avoided.

Specific Situations to Apply Technique #3

 

The Property

Low Mortgage, High Seller Equity

Property is in Run-Down Condition

Low Interest Assumable Mortgages

 

The Buyer

No Cash at All

Lump Sum Cash Due Soon

Poor Credit

 

The Seller

Must Sell Immediately

Wrap Around Mortgage To Using Equity To Purchase  

Wrap Around Mortgage