Wrap-around mortgages are innovative home loans designed to make buying and selling financed houses a bit simpler than with traditional methods. Wrap-around mortgages, also referred to as wraps, carry distinct advantages and disadvantages for both buyers and sellers. Real estate investors, individuals and families should familiarize themselves with the unique characteristics of wraps before signing an agreement.
Wrap-around mortgages allow real estate buyers to take over the deed to a property without using the traditional means of assuming the original mortgage or refinancing. These mortgages make real estate transactions simpler and safer for both buyers and sellers, reducing costs for both sides. A wrap agreement is structured so that the seller retains the deed to the property until the original mortgage has been paid, at which time the deed transfers to the buyer.
The seller generally extends a wrap-around mortgage to the buyer in a real estate transaction; therefore, it is considered a form of seller financing. The buyer who assumes the wrap agrees to pay regular installments to the seller, who then uses the money to pay off his existing mortgage obligation—which remains in the seller's name—while taking additional amounts as profit. Sellers can generate profit in several ways, including requiring a higher-valued wrap than the amount outstanding on their own mortgage, and by charging a slightly higher interest rate than that in their existing obligation.
Buyers and Sellers
The sellers in wrap-around transactions are often the mortgage lenders who technically own financed homes. Lenders can assist homeowners in these transactions by providing a relatively safe and reliable means for them to sell the property without transferring their existing contract. Buyers are often real estate investors looking to purchase property with little money down, but individual home buyers can use wraps to purchase homes as well.
Although they are safer than private credit arrangements, wraps still present risks to sellers. If the buyer defaults on a wrap-around mortgage, the original owner will still be liable for making payments on his existing mortgage. This can essentially double the family's housing bill until they can find a new tenant or buyer, or until the buyer becomes current on his payments.
- Brick family house image by tarheel1776 from Fotolia.com
- How to Cancel Out a Land Contract
- Definition for Transferable Mortgage
- What Is a Wrap Mortgage?
- Can a Cosigner Assume a Mortgage at Any Time?
- How Does an Escrow Account Work for a Land Contract?
- Who Holds the Mortgage in Rent to Own Homes?
- What Is a Seller-Financed Mortgage?
- What Does Subject to Existing Deed of Trust Mean?