Purchasing a home usually means you’ll get introduced to a lot of words you might not recognize. A wraparound mortgage may be one of them. This nature of mortgage is one that is popping up more lately, so it’s best to understand what it is.
A wraparound mortgage is one where the lender assumes the responsiblity of paying off an existing mortgage.
The wraparound mortgage essential incorporates the sellers mortgage into its details. The following will provide a excellent example. Mr. O’Leary wants to sell his home, but has an outstanding loan balance of approixmately $60,000. The home is bought by Mr. Stevens for $100,000. Mr. Stevens for his part, has provided a down payment of $10,000, and has obtained a loan for the remaining $90,000 dollars of the purchase price. So, the $90,000 loan of Mr. Stevens will wrap around the original $60,000 mortgage of Mr. Jones.
For the most part, these types of mortgages are well liked by lenders, since they can usually transform a lower interest rate mortgage into a higher one, therefore making them more of a profit. The percentage difference may be small, but it can mean big long term profits for the lender.
These types of mortgages are most often provided by the lender of the seller. One thing to remember is that if the loan isn’t assumable, a wraparound mortgage can’t be used. This occurs when the original borrower on the loan is allowed to have his obligations “assumed” by another borrower. In most cases, you need permission from the lender to assume the previous loan, with the exception of FHA and VA loans. One possible exception to this are fixed rate loans that have a “due on sale” term in the contract. That means that the loan is not assumable.
Wrap around mortgages are most often seen in markets where interest rates are on the rise. The main reason is that the sellers can end up selling their house for a better price overall. Like all investments, though, there is a risk that the rate of investment won’t equal the rate of return. Another possible problem is that all the risk and reward is locked into the one investment. Once the parties involved make the commitment to use a wrap-around mortgage, and the equity goes down, both parties could be hurt.