What are Wrap-Around Mortgages?

Home buyers can use wrap-around mortgages when buying a home. The wrap around mortgage allows the borrower to take advantage of a lower interest rate on the first mortgage. A second mortgage is taken out and combined mortgages are recomputed based on the lower interest rate.

The Wrap-Around Mortgage Defined

A wrap around mortgage is defined as a process where the seller and the buyer agree to use the existing loan in the new purchase. The buyer assumes the loan from the seller and continues payments on the old loan. The buyer pays an interest rate that is based on the difference between the old interest rate and new loan interest rates.

The way that a wrap-around mortgage works is that the seller and borrower reach an agreed upon price for the sale of the home. The buyer looks at the amount of remaining mortgage on the home and pays the difference in value and equity to the seller. Then, the buyer assumes the amount of mortgage that is remaining.

Negotiating the Wrap-Around Mortgage

The loan is negotiated, similarly to the way an assumption would be, where a new party is added to the loan. The new terms are put into a contract and the interest rate is applied, which permits the loan to continue and the buyer to

assume the obligation. This relieves the seller of the unpaid balance and allows an easier transition of the home from the seller to the buyer.

A wrap around mortgage involves some work on part of the buyer and the seller and requires the lender to ultimately approve the arrangement. For a seller with a large unpaid balance, a wrap around mortgage provides a way to get from under the debt obligation and transfer it to a new party. The buyer benefits by reducing their loan fees and costs that are associated with applying for a new loan because these mortgages are less costly than the typical mortgage. The process requires that the buyer have a sufficient amount to give to the seller upon completion of the loan agreement and assumption of the exiting loan.

Many states do not permit the use of the wrap-around mortgages. If you are considering a wrap-around mortgage, you should contact the seller and existing lender in order to determine whether the loan is available and the terms for the loan. If a wrap around loan is permissible in the state that you live in, the buyer and the seller should examine the terms of the purchase. Performing cost comparisons will help show the advantage, or disadvantage, of a wrap-around mortgage and the viability of other financing options.

Source: loan.com

Category: Credit

Similar articles: