WLCCI

Lets say a seller has a property with a fair market value of $50,000 and an existing assumable mortgage of $30,000 at 8% interest with payments of $245 per month. The seller’s equity is $20,000 ($50,000 minus $30,000).

A conventional “no money down” way to purchase the property would call for the buyer to assume the first mortgage of $30,000. The buyer then would give the seller a second mortgage for the $20,000 balance at 10% interest with payment of $200 per month. The purchaser’s total payment would be $445 per month ($245 + 200).

In order to avoid the cost and liability of assuming the existing mortgage, offer the seller a $50,000 wrap-around mortgage, payable at the rate of 10% interest with payments of $445 per month. On the surface, it appears to be the same proposition, but look at the difference.

A wrap-around mortgage is a new mortgage which literally “wraps” around the old mortgage. By using a wrap-around mortgage, the buyer makes payments on the old mortgage. Since the payments on the new mortgage are larger than on the old mortgage, the seller keeps the differences.

In this example, you will pay the seller approximately $5,000 per year interest ($30,000 x 8%) on the first mortgage. The seller will keep the difference, or $2,600 per year ($5,000 minus $2,400). The seller’s equity is $20,000 so the seller is actually netting approximately 13% ($2,600 divided by $20,000) on the transaction, and the first mortgage is being paid off at a faster rate than the wrap-around mortgage.

Therefore, when the first mortgage is paid off in fifteen years or so, the wrap-around mortgage will have an unpaid balance of about $35,000. The seller’s equity has effectively grown from $20,000 to $35,000 which is good for both parties.

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