Wrap Around Mortgage

When there is an existing, legally assumable first mortgage on a property you want to buy using a down payment plus a seller carry-back second mortgage (see above for discussion of carry-back notes secured by second mortgages or trust deeds), you can expect a savvy

Carry-back financing can be a "win-win transaction for both buyer and seller."

Protect your interests by requiring the seller to select a neutral collection agency where you can send your wrap payment.

seller or agent to start throwing around terms like "wrap" or "wrap-around." The reason: Such financing may provide a better return to the seller. Wraps—like other forms of creative financing—typically carry balloon payments.

Instead of financing the second-trust or second-mortgage note, the seller may suggest carrying back what is called an "All-Inclusive Trust Deed" note for an amount equal to the assumable first mortgage plus equity. The rate you will be offered on the wrap will be less than what you would have paid for a carry-back second and more than the rate on the assumable first. You'll be making one payment to the seller/lender covering the assumable first and the amount you'd otherwise be paying for the carry-back second—at a blended rate. This puts more money in the seller's pocket and also earns her the benefit of principal reduction that is occurring as payments are made on the first. The blended rate plus the value of principal reduction on the assumable first boosts the seller's overall yield or return on the all-inclusive trust deed.

Wraps remove the seller/lender's concern that the buyer won't make payments on the assumable first loan because the buyer will now make just one payment—to the seller. The seller then makes the payment on the first loan. Broadbent and Rosenberg suggest that you, as buyer/borrower, protect your interests by requiring the seller to select a neutral collection agency where you can send your wrap payment. The agent then becomes responsible for making payments on the assumable first loan and disbursing remaining funds to the seller.

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