Wraparound Alternative
Sources To
Institutional
Lenders...
A wraparound
mortgage encompasses
existing mortgages
and is subordinate
or junior to them. The existing
mortgages stay on
the property and the
new mortgage wraps
around them.
This is an attractive
alternative
method of financing
a real estate
investment
venture.
To illustrate,
presume the existing mortgage
explain in the
previous example, Purchase
Money Mortgage,
carries an interest
rate of 7% and that
there are 15 years
remaining on the
loan. Presume
further that current
interest rates are
11%. With a
wraparound it is
possible for the
buyer to pay less
than 11% and at the
same time for the
seller to receive
more than 11 % on
the money owed him.
This is done by
taking the buyer's
$60,000 down payment
and then creating a
new junior mortgage
that includes not
only the $20,000
owed on the existing
first mortgage, but
also the $40,000 the
buyer owes the
seller. In other
words, the
wraparound mortgage
will be for $60,000,
and the seller
continues to remain
liable for payment
of the first
mortgage. If the
interest rate on the
wraparound is set at
10%, the buyer saves
by not having to pay
11% as he would on
an entirely new
loan. The advantage
to the seller is
that he is earning
10% not only on his
$40,000 equity, but
also on the $20,000
loan for which he is
paying 7% interest.
This gives the
seller an actual
yield of 11 1/2% on
his $40,000. (The
calculation is as
follows. The seller
receives 10% on
$60,000, which
amounts to $6,000.
He pays 7% on
$20,000, which is
$1,400. The
difference, $4,600,
is divided by
$40,000 to get the
seller's actual
yield of 11 1/2%.)
Wraparounds are
not limited to
seller financing. If
the seller in the
above example did
not want to finance
the sale, a third
party lender could
provide the needed
$40,000 and take a
wraparound mortgage.
The wraparound
concept will not
work when the
mortgage debt to be
"wrapped"
contains an
enforceable
alienation
clause.
Wraparound
To Subordination
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