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Millionaire Now! by Larry NusbaumThis blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth". |
Wrap Loans aka Wrap-Arounds
Posted on 10/29/2006 08:23 AM | Link | Post Comment
A wrap-around mortgage is a loan transaction in which the lender assumes responsibility for an existing mortgage. For example, S, who has a $70,000 mortgage on his home, sells his home to B for $100,000. B pays $5,000 down and borrows $95,000 on a new mortgage. This mortgage "wraps around" the existing $70,000 mortgage because the new lender will make the payments on the old mortgage.
This method of seller financing is risky if the underlying first loan has a "due on sale" clause because the loan might be called due when the first lender becomes aware that the property has transferred title. This is less of a problem in the commercial world where so many loans are privately financed.
A seller usually will want to incorporate a late charge to encourage the buyer to make monthly loan payments on time. A buyer will probably want to stipulate that prepayment of the loan be without penalty. This should not cause a problem unless the loan payments are a source of retirement income, in which case early prepayment could have negative financial repercussions for the seller...
Most sellers prefer to have a due-on-sale provision included in the note, but this can be a negotiable item. Buyers who are concerned that they might be forced to sell during a period of high interest rates can request that the note be assumable by a future buyer, and sellers might find this provision agreeable as long as they have the right to approve the future buyer's credit report and financial statement.
Here's what it can look like: Note on WRAPAROUND Mortgage Economics
I would be happy to sell a building and provide "seller financing" and wrap the new loan around my old seller provided loan. It allows me to control the sale, the downpayment, defer capital gains taxes (installment sale), get much more than my original investment out, and foreclose easily (as I am the lender) and be in a position to take it back and sell it again.
This method of seller financing is risky if the underlying first loan has a "due on sale" clause because the loan might be called due when the first lender becomes aware that the property has transferred title. This is less of a problem in the commercial world where so many loans are privately financed.
A seller usually will want to incorporate a late charge to encourage the buyer to make monthly loan payments on time. A buyer will probably want to stipulate that prepayment of the loan be without penalty. This should not cause a problem unless the loan payments are a source of retirement income, in which case early prepayment could have negative financial repercussions for the seller...
Most sellers prefer to have a due-on-sale provision included in the note, but this can be a negotiable item. Buyers who are concerned that they might be forced to sell during a period of high interest rates can request that the note be assumable by a future buyer, and sellers might find this provision agreeable as long as they have the right to approve the future buyer's credit report and financial statement.
Here's what it can look like: Note on WRAPAROUND Mortgage Economics
I would be happy to sell a building and provide "seller financing" and wrap the new loan around my old seller provided loan. It allows me to control the sale, the downpayment, defer capital gains taxes (installment sale), get much more than my original investment out, and foreclose easily (as I am the lender) and be in a position to take it back and sell it again.
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