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 $35,000 -a win/win situation.
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Example
Summary
Technique #3
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Wrap-Around
Mortgage
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What
You Need To
Begin:
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Nothing
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Summary
Of Terms:
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Fair
market value
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$
50,000
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Assumable
mortgage
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$
30,000
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Interest
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8%
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Monthly
payments
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$
245
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Seller's
equity
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$
20,000
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Procedures:
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Offer
a wrap-around
mortgage at
10% interest
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$ 50,000
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Yearly
interest
payment to
seller
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$
5,000
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Seller's
first mortgage
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$
30,000
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At
8% interest,
yearly
interest
payment to
first mortgage
holder
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$
2,400
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Amount
of interest
seller earns
per year
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$
2,600
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Results:
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- The seller earns $2,600
in
interest
per year
for a 13%
return on
his
$20,000
equity.
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- The
first
mortgage
is paid
off in 15
years.
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- The
seller's
equity in
the
mortgage
has grown
from
$20,000 to
$35,000
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- Buyer,
no money
down deal
is made
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- The
cost and
liability
of
assuming
the first
mortgage
is
avoided.
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Specific
Situations to
Apply
Technique #3
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The
Property
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Low
Mortgage, High
Seller Equity
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Property
is in Run-Down
Condition
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Low
Interest
Assumable
Mortgages
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The
Buyer
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No
Cash at All
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Lump
Sum Cash Due
Soon
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Poor
Credit
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The
Seller
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Must
Sell
Immediately
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Wrap
Around
Mortgage to Using
Equity To Purchase
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