Unwrapping the Mortgage Wrap
Today I’m covering all the nuances and steps for the “wrap-around mortgage”. A wrap-around mortgage is a loan arrangement in which an existing loan is retained, and an additional, larger loan is then created around it. The new lender agrees to make payments on the existing loan, which usually has a lower interest rate than the new loan being added. In the end, the rate on the new loan produces a higher yield than the old loan currently attached to the property.
The most common example of a wrap-around loan is through the sellers themselves. They will have existing financing on the property, and through the wrap-around mortgage, will continue to make payments on that original loan and keep the difference from the payments the buyer submits on the new, higher-yield loan.
So how do you structure a wrap-around mortgage? Usually it takes the second position on the property, behind the original mortgage, and is larger than the first position mortgage.
For example, a $150,000 house has an existing balance of $90,000. The monthly payment is $600 a month. You agree to pay the seller the full $150,000 with a monthly payment of $900. The seller continues to make payments on the first mortgage and pockets the $300 difference. Once that first mortgage is paid off, the seller then gets to keep the entire $900 for themselves until the terms of the second, wrap-around mortgage has been satisfied.
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Good Luck and Happy Investing!
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