What Is a Wrap-Around Loan?

A wrap-around loan is a type of mortgage loan that can be used in 澳洲幸运5官方开奖结果体彩网:owner-financing dealsಞ. A wrap-around loan involves the seller’s mortgage on the home and adds additional incremental value to arrive at the total purchase price that m🍒ust be paid to the seller over time rather than the lender. This type of loan helps homebuyers who don't qualify for traditional mortgages while giving the seller the potential to earn a profit.

Understanding Wrap-Around Loans

澳洲幸运5官方开奖结果体彩网:Seller financing is a type of financing that allows the buyer to pay a principal amount directly to the seller. In a seller-financed deal, the agreement is based upon a 澳洲幸运5官方开奖结果体彩网:promissory note that details the terms of the financing. A seller-financed deal also doesn't require that principal be exchanged upfront, and the buyer makes installment payments directly to the seller, which include principal and interest.

Wrap-around loans build on the owner-financing concept and use the same basic structuring. A wrap-around loan structure is used in an owner-financed deal when a seller has a remaining balance to pay on the property’s 澳洲幸运5官方开奖结果体彩网:first mortgage loan.

A wrap-around loan accounts for the remaining balance on the seller’s existing mortgage at its contracted mortgage rate and adds an incremental balance to arrive at the total purchase price. The buyer signs a 澳洲幸运5官方开奖结果体彩网:promissory note, promising to make monthly payments to the buyer. Both the title and deed for the property are transfe🅷rred to the buyer. The sell🧸er continues to make payments on the existing mortgage.

In a wrap-around loan, the seller’s base 澳洲幸运5官方开奖结果体彩网:interest rate is based on the terms of the existing mortgage loan. To break even, the seller must a⛦t least earn interest that matches the rate on the loan, which still must be repaid. Thus, a seller has the flexibility to negotiate the buyer’s interest rate based on their current terms. Generally, the seller will want to negotiate the highes👍t possible interest rate to make payments on the first mortgage and also earn a spread on the deal.

Risks of Wrap-Around Loans

Wrap-around loans can be risky for sellers since they take on the full default risk on the loan. Sellers must also be sure that their existing mortgage does not include an alienation clause, which requires them to repay the mortga♓ge lending institution in full if collateral ownership is transferred or if the collateral is sold. Alienation clauses are common in most mortgage loans, which often prevent wrap-ꦑaround loan deals from occurring.

There are also risks for homebuyers who agree to take on a wrap-around loan. For example, the buyer in the deal may end up paying a higher interest rate than if they would with a traditional mortgage. And if the original lender doesn't have a clause in place for an 澳洲幸运5官方开奖结果体彩网:assumable mortgage, they may begin foreclosure proceedings and repossess the home.

Example of a Wrap-Around Loan

Here's a hypothetical example to show how wrap-around loans work. Let's say Joyce has an outstanding mortgage worth $80,000 on her home with a fixed interest rate of 4%.

She agrees to sell her home to Brian for $120,000, who puts 10% down and borrows the remainder, or $108,000, at a rate of 7%. Joyce earns 7% on $28,000 (the𝄹 difference between $108,000 and the $80,000 she still owes), plus the difference between 7% and 4% (i.e. 3%) on the balance of the $80,000 mortgage.

The Bottom Line

Wrap-around loans make it easy for homebuyers and sellers to come together. This type of transaction removes banks and other ho♑me lenders from the equation, so the buyer makes monthly payments to the seller instead. Loans like this may be more favorable because of the benefits, which include the potential of earning a profit for the seller and how easy it is to qualify for the buyer. Both parties should understand t🧔hat there are risks that come with wrap-around loans, including higher-than-normal interest rates and the chance for default.