Wraparound Mortgage (Wrap)
A wraparound mortgage, commonly referred to as a "wrap," is a sophisticated financing technique in real estate transactions where the seller provides financing to the buyer, but the seller's existing mortgage remains in place. This type of loan arrangement is particularly used when a buyer cannot secure traditional financing or when both parties agree that this method offers mutual benefits.
How It Works:
In a wraparound mortgage, the seller extends a new mortgage to the buyer, which "wraps around" the seller's existing mortgage. The buyer typically makes a down payment and then agrees to make regular mortgage payments to the seller. These payments are generally higher than the seller's existing mortgage payments. The seller uses the payments received from the buyer to continue paying off their original mortgage while pocketing the difference as profit
For example, if the seller's current mortgage has a balance of $200,000 at an interest rate of 4%, and the wraparound mortgage provided to the buyer is $250,000 at an interest rate of 6%, the seller will continue paying the original mortgage at 4% while collecting payments from the buyer at 6% on the entire $250,000 amount.
Key Components:
Benefits:
Risks and Considerations: While wraparound mortgages can be beneficial, they come with significant risks, particularly for the seller. The original lender (the bank holding the first mortgage) may have a "due on sale" clause in their mortgage agreement. This clause gives the lender the right to demand full repayment of the loan if the property is sold or transferred. Engaging in a wraparound mortgage could potentially trigger this clause, leading to the requirement for immediate full payment of the seller’s original mortgage, which could be financially devastating if the seller is unprepared.
Disclosure: A wraparound mortgage is a sophisticated type of transaction and could trigger the original mortgage's due on sale clause. There is significant debate regarding the associated risks to the seller concerning this clause and the statutory laws that allow this type of mortgage arrangement. As real estate professionals, we strongly recommend that all parties involved, whether buyers or sellers, consult with a qualified real estate attorney to identify and mitigate all associated risks.
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