What’s “wraparound” financing?
Wraparound financing, or — as it is sometimes called — an “all inclusive deed of trust,” usually means there is a loan on the property which can be assumed, say $30,000 at 6 percent, and that a seller or other party is willing to take back a loan from the buyer, say, $100,000 at 8 percent.
The $100,000 consists of the two parts: The old $30,000 debt and $70,000 in new debt. In effect, the new loan is “wrapped” around the old one because the old mortgage is not repaid at closing.
The seller or lender effectively receives 2 percent interest on the first $30,000 (8 percent less 6 percent equals 2 percent) and 8 percent on the remaining $70,000. Since the seller or lender did not provide the first $30,000, the rate of return for the $70,000 they did provide is substantially higher than 8 percent (8 percent x $70,000 plus 2 percent x $30,000).
Wraparound financing — if allowed — can be a very good deal for both buyers and sellers. However, such loans are complex and all terms should be reviewed by an attorney before acceptance. For instance, what happens if the buyer makes payments on the $100,000 mortgage above, but the seller does not make payments on the existing $30,000 loan? How is insurance to be handled? What happens if the buyer wants to refinance? If the $30,000 is not assumable can the lender call the loan if the property has a wrap-around loan and a new owner? Etc.
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