The Wrap-Around Mortgage - Posted by Bennett Broach

Posted by Bennett Broach on November 01, 2000 at 02:38:37:

Thank you for that bit of info.I understand it better now.

The Wrap-Around Mortgage - Posted by Bennett Broach

Posted by Bennett Broach on October 31, 2000 at 04:40:37:

Has anyone used this method and how does it work?

Re: The Wrap-Around Mortgage - Posted by Jack Compton

Posted by Jack Compton on October 31, 2000 at 22:25:58:

Hello Bennett. In most cases, look at the wraparound mortgage as high interest for the seller, and a much larger investment for you.

A wraparound is exactly what the name implies; it wraps around any existing mortgages that are on a property. In some states it is referred to as an ALL INCLUSIVE DEED OF TRUST.

As for how it works, you have to understand that some sellers do not like being in a second loan position; hence, they feel they have no control over whether the first mortgage is being kept current. And, most likely, the seller will be unwilling to be locked in on a long-term second mortgage at a low percent interest when the current first mortgage interest rates being paid are higher. Plus, any investor knows that as you increase the interest rate, or decrease the term to an example of 10 years (from 25 years), the size of the second mortgage payments will ruin your cash flow. But, there is a way to benefit both you and the seller. Example:

You as the buyer, ask the seller to carry a wraparound mortgage on a $100,000 property. Next, you deal for the seller to accept an example of 9% interest. Now keep in mind that the mortgage wraps around the existing first mortgage, plus covers the amount of the second mortgage that you might have previously wanted him/her to carry. (I’m giving you a basic structure to work from, but the details will have to be filled in by the actual amounts and creative structuring of the deal). So, if structured correctly, your annual mortgage payments on the wraparound would be less than if the seller had carried the straight second mortgage and added that payment to the first mortgage. If your figures do not come to that conclusion, you must back track and formulate the deal so that it does. Plus, your figures should convince the seller that he/she will profit better this route over the term of the wraparound; once again, you must structure the deal so that both you and the seller can benefit from making the deal.

And last but not least. If you deal in rural property, and you sell acreage tracts on property you have financed, you can do wraparound mortgages on each parcel you sell. Beforehand, you make a deal with your seller to release each parcel as it’s paid off. It works rather well, and it requires more than I’ve stated here, but gives you the basic idea of how it’s done. I wish you success in your REI business! —Jack