Why do a_wraparound_mortgage
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http://www.saferforyourlife.info/why-do-a-wrap-around-mortgage/ March 31, 2013 Why do a wrap-around mortgage? A wrap-around mortgage is a loan transaction in which the bank assumes responsibility for an existing mortgage. For example, Charles who has a $70,000 mortgage on his home sells his home to Gary for $100,000. Gary pays $5,000 down and borrows $95,000 on a new mortgage.This mortgage "wraps around" the present $70,000 mortgage because the new lender will make the payments on the old mortgage. A wrap-around is sexy to banks because they will be able to leverage a reduced interest rate on the current mortgage into a higher yield for themselves. As an example, suppose the $70,000 mortgage in the example has a rate of 6% and the new mortgage for $95,000 has a rate of 8%. His total return on the $25,000 is about 13.5%. To do as well with a second home loan, he would have to charge 13.5%.. Usually, not always, the lender is the seller. The alternative type of home-seller financing is a second mortgage. The massive difference both approaches are that with second mortgage financing, the old mortgage is repaid; while with a wrap-around it is not. Assumable loans are those on which existing borrowers can transfer their needs to qualified house buyers. Today, only FHA and VA loans are assumable without the permission of the bank. Other flat rate loans carry "due on sale" clauses, which require that the mortgage be repaid in full if the property is sold. Due-on- sale prohibits a home customer from presuming a seller's outstanding mortgage without the lender's authorization. If authorization is given, it will always be at the current market rate. Wrapping can frequently be used to by-pass restrictions on presuming old loans, but I do not advocate using it for this reason. The home seller who does this violates his contract with the bank, which he may or may not get away with. In most states, Escrow corporations are required by law to inform a bank whose loan is being wrapped. If a wrap-around deal on a non-assumable loan does close and the lender uncovers it thereafter, watch out! The bank will either call the loan, or demand an instant increase in IR and potentially a healthy assumption fee. When market IRs begin to rise, interest in wrapping assumable loans will also rise. The inducement to sellers is powerful, since they do not only obtain a high-yielding investment, but they can frequently sell their home for a better price. But the high return carries a heavy risk. When Charles, in my example sold his place with a wrap-around, he converted his equity from his house, which he no longer owns, to a mortgage loan. Previously, his equity was a $100,000 house less a $70,000 mortgage. Now, his equity is composed of the $5,000 deposit and a $95,000 mortgage that he owns less the $70,000 mortgage that he owes. The new owner Gary,has only $5,000 of equity in the property. If a tiny decline in market values erases that equity, the owner has no finance motivation to maintain the property. If the purchaser defaults on his mortgage, Charles will be required to foreclose and sell the property to pay off his very own mortgage. In some seller-provided wrap-around, the payment by the buyer goes not to the seller but to a third party for transmission to the original bank. This is a very dodgy arrangement for the vendor, who remains liable for the first loan. He does not know if the payment on the old mortgage was made or not — until he receives notice from the lender that it was not. I recently heard from a seller who did such a wrap-around in 1994, and has been getting the run-around ever since. Payments by the purchaser have regularly been late, and the seller's credit has deteriorated consequently. About Charles Charles Tate Jr. has been recommending the use of non damaging household cleaners
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Transcript of Why do a_wraparound_mortgage
http://www.saferforyourlife.info/why-do-a-wrap-around-mortgage/ March 31, 2013
Why do a wrap-around mortgage?
A wrap-around mortgage is a loan transact ion in which the bank assumes responsibility for anexist ing mortgage. For example, Charles who has a $70,000 mortgage on his home sells his hometo Gary for $100,000. Gary pays $5,000 down and borrows $95,000 on a new mortgage.Thismortgage "wraps around" the present $70,000 mortgage because the new lender will make thepayments on the old mortgage. A wrap-around is sexy to banks because they will be able toleverage a reduced interest rate on the current mortgage into a higher yield for themselves. As anexample, suppose the $70,000 mortgage in the example has a rate of 6% and the new mortgagefor $95,000 has a rate of 8%. His total return on the $25,000 is about 13.5%. To do as well with asecond home loan, he would have to charge 13.5%..
Usually, not always, the lender is the seller. The alternat ive type of home-seller f inancing is asecond mortgage. The massive dif ference both approaches are that with second mortgagef inancing, the old mortgage is repaid; while with a wrap-around it is not. Assumable loans are thoseon which exist ing borrowers can transfer their needs to qualif ied house buyers. Today, only FHAand VA loans are assumable without the permission of the bank. Other f lat rate loans carry "dueon sale" clauses, which require that the mortgage be repaid in full if the property is sold. Due-on-sale prohibits a home customer f rom presuming a seller's outstanding mortgage without thelender's authorizat ion. If authorizat ion is given, it will always be at the current market rate.
Wrapping can frequent ly be used to by-pass restrict ions on presuming old loans, but I do notadvocate using it for this reason. The home seller who does this violates his contract with thebank, which he may or may not get away with. In most states, Escrow corporat ions are required bylaw to inform a bank whose loan is being wrapped. If a wrap-around deal on a non-assumable loandoes close and the lender uncovers it thereafter, watch out! The bank will either call the loan, ordemand an instant increase in IR and potent ially a healthy assumption fee.
When market IRs begin to rise, interest in wrapping assumable loans will also rise. The inducementto sellers is powerful, since they do not only obtain a high-yielding investment, but they canfrequent ly sell their home for a better price. But the high return carries a heavy risk.
When Charles, in my example sold his place with a wrap-around, he converted his equity f rom hishouse, which he no longer owns, to a mortgage loan. Previously, his equity was a $100,000 houseless a $70,000 mortgage. Now, his equity is composed of the $5,000 deposit and a $95,000mortgage that he owns less the $70,000 mortgage that he owes. The new owner Gary,has only$5,000 of equity in the property. If a t iny decline in market values erases that equity, the owner hasno f inance mot ivat ion to maintain the property. If the purchaser defaults on his mortgage, Charleswill be required to foreclose and sell the property to pay of f his very own mortgage.
In some seller-provided wrap-around, the payment by the buyer goes not to the seller but to athird party for t ransmission to the original bank. This is a very dodgy arrangement for the vendor,who remains liable for the f irst loan. He does not know if the payment on the old mortgage wasmade or not — unt il he receives not ice f rom the lender that it was not. I recent ly heard f rom a sellerwho did such a wrap-around in 1994, and has been gett ing the run-around ever since. Payments bythe purchaser have regularly been late, and the seller's credit has deteriorated consequent ly.
About Charles
Charles Tate Jr. has been recommending the use of non damaging household cleaners
Charles Tate Jr. has been recommending the use of non damaging household cleanersfor three years now, and he has been using assorted mediums to out line the risks ofcommon household cleaners and make recommendat ions for f it ter, more natural alternat ives.
The recommendat ions Charles: Has just released a E book ent it led 20 Reasons explaining whyHousehold Cleaners are Lethal to you and your Pets,
