For some, the process of financing a new home purchase can be somewhat tricky. Given the hefty down payment requirements associated with buying a home, as well as the stringent financial profiling undertaken by banks to assess risk, many borrowers breathe a sigh of relief once they are approved for a loan. In the best scenario, the terms of this loan are financially advantageous for the borrower. In the worst, high interest rates could hobble the ability of the new homeowner to save for the long term. An all-inclusive trust deed can help provide valuable assistance to the buyer and seller of a home by folding the new mortgage and existing mortgage into a single payment platform.
TL;DR (Too Long; Didn't Read)
An all-inclusive trust deed allows borrowers to take out a mortgage that may be considerably more financially advantageous than a conventional loan. These wraparound mortgages combine the pre-existing mortgage of the seller with new funding from the borrower.
All-Inclusive Trust Deeds Basics
Fundamentally, an all-inclusive trust deed is designed to fuse the new mortgage secured by the buyer of a property with the existing mortgage of the current owner of the property. Although this may seem like an overly complex procedure, the end result is streamlined and highly efficient.
Once an all-inclusive trust deed has been secured, the buyer of the property will only be required to make payments to the title company overseeing the trust deed. The title company will then proceed to distribute these funds to the specific lenders involved. Although it is common for the title company to charge a small fee for these services, it is likely outweighed by the cost benefits to the buyer of the property.
Advantages of Trust Deeds
Also commonly referred to as a wraparound mortgage, an all-inclusive trust deed provides several benefits for the property buyer and seller alike. An all-inclusive loan allows the buyer to reduce the size of their mortgage because they will only need to borrow an amount close to the difference of the property’s sale price and the current balance on the seller's original mortgage. For example, if the seller of the property has $60,000 on their mortgage and the home is selling for $200,000, the buyer may only be required to borrow $140,000, or a sum slightly higher than that in order to create a profit opportunity for the seller.
By applying for a smaller loan, the likelihood of receiving more favorable borrowing terms is increased. This is particularly true if the borrower may have otherwise been rejected or received high interest rates on their loans due to their previous financial history. Likewise, the buyer will also be able to take advantage of the seller's interest rates on their original mortgage. Assuming that these interest rates are lower than the rate that would be offered to the buyer for a full mortgage, the buyer will save a significant amount of money over the length of repayment.
For the seller, a wraparound mortgage will allow them to effectively pay off their first mortgage and profit off the fact that the buyer is making the payments on the second mortgage.
Other Factors to Consider
An all-inclusive mortgage also carries a number of benefits for lenders. The most important of these is the reduced loan balance for the new borrower, which significantly lessens the inherent risk in the loan and softens the blow that would potentially be incurred through default. With that in mind, lenders have a vested interest in encouraging their borrowers to secure wraparound mortgages whenever possible.
Although certain situations may apply where these mortgages are not the preferred course of action for either the buyer or lender, they remain a generally advantageous solution for those seeking to optimize their borrowing over the long term.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community.