Benefits or uses for a Wraparound Mortgage

Benefits or uses for a Wraparound Mortgage

1. It is often used to entice the seller to hold secondary paper (paper being a mortgage). The benefit of the increased return my help a potential purchaser get a property. There are many transactions which are saved simply because the sellers are convinced to hold secondary paper.

2. The wraparound mortgage is a method of leverage a sellers positioon upward with the idea of increasing the effective yield earned on the mortgage. The ability to increase the return on funds mortgaged is the primary benefit of the wraparound

3. When the existing financing is a relatively low rate, the result is that the constant paymet percentage is a also relatively low, then this is a good sign that a wraparound good be a good tool in this situation.

4. Sometimes the existing financing has provisions that make prepayment difficult or costly, then the wraparound mortgage can be used as an effective solution to the inability to get new financing. Sometimes when there are several mortgages encumbering a property, there an be provisions that will create problems such as this. In this case i might be best to consider a wraparound when such conditions are present. 

5. Sometimes on existing property there is a nonassumption caluse. Institutional lenders can often use this provision in their loans. Thus when a proeprty is sold, the buyer must make an application to the lender and ask to be permitted to assume the obligation, some lenders can reject this application, but some will allow the wraparound if the first is assumed. Often however, the lenders reserve tthe right to adjust the interest rates whe sch a new assumption takes place.

It must be remembered however that a wraparound mortgage does not require the buyer to assume the existing financing. This fact sometimes creates difficulties for third parties to lend on a wraparound. When a buyer purchases a property and gives the seller a wraparound mortgage, the existing financing remains the obligation of the seller. It is then the seller that makes the payments on the existing mortgages. Sometimes existing financing may be encompassed within the wraparound and there maybe certain provisions which would make the wraparound difficult and in violation of the contract terms. 

6. With a wraparound mortgage there is an increase in cash which is a benefit. Therefore, when the sale of a property is hampered by a low cash flow. For example lets say that the owner of a property can not increase cash flow by raising rents or lowering expenses. In this case the only way to increase cash flow would be two lower debt service. The yiled resulting from the cash flow, based on the invested capitl, must meet what the investor requires. 

7. Stict mortgage markets are often very applicable markets where the wraparound can be used. For example if a seller is having trouble selling a property due to strict market conditions. The tightness of the market is usually only elative to the overall rate on existing finaing. Therefore if you have an existing property that has financing at very low rates, and the current is a few percent above those rates, then you should look at the possibility of a wraparound. In many cases the inability to refinance a property within the economics of the deal will bring attention to the possibility of using a wraparound more quickly.

8. Costs of refinancing can sometimes be a major proble, and this is another reason why you should look at a wraparound. Often placing a wraparound is less costly to set up then offering new financing. The seller usually only charges the legal costs involved in the preparation of the loan document which is often not substantial.

9. Multimortgaged properties are often difficult to sell or market because of the number of mortgages present. If you have a property that has more than three mortgages on them, the wraparond can be used to convert these into one. Consequently the buyer, will therefore make only one payment on the wraparound, and then the seller must then make payments on the encompassed mortgages. 

10. When a property is being marked with clear and simple financing this can often bring about a quick and less time negotiating. If a property has a low loan to to value ratio, in other words the seller has a lot of equity in the property then often buyers will try use this fact to their advantage and buy the property at a lower price. For example lets say a commercial property is offered at $100,000 with an $90,000 mortgage on it. This would leave only $10,000 to bargain with. If the buyer knows there is a lot equity, they will try to bargain the price lower. The broker knows this and will therefore present the wraparound in his quotations. By increasing the the loan to value fo the property this often benefit the negotiations. 

11. In some cases a balloon mortgage can create difficulties in selling property. If the property is an income producer but there is little chance the property can be refinanced then the wraparound might be able to be used . 

12. Buyers often benefits as much from the wraparound as the seller. The wraparound can be used to satisfy the needs of both. The buyers benefits are often in comparison with the overall mortgage market, and may not be in line with the current financing that exists on the property. Therefore if a particular transaction calls for refinancing, the the buyer can offer terms that are slighly cheaper for him then the general lending market. Thus the buyer often obtains better terms than the seller then he could get in the institutional market, he also saves in points. The seller also ultimately benefits because he gets his desired yield as long as enough time passes.

The most often reason why wraparounds are used is to increase cash flow on an income property for sale, however there is often a sacrifice in another area. In essence with the use of the wraparound  the resulting effects on the dollars paid and received by the seller or lenders should be clearly understood. For example it is noral fo rthe for the balance of the difference (This is the mortgagees equity), to increase over a period of time. Remember the difference in wraparound terms refers to the amount of the wraparound that is left when you subtract the existing amount which is currently owed on the existing financing. This amount is called the equity the seller has in in the total amount of the wraparound. To give an example the wraparound for a $100,000 that encloses a first mortgage totalling $90,000 with hae a difference of $10,000. Sometimes this difference is called the wraparound difference, or the lenders position, or the mortgagee’s equity. The difference does not stay constant throughout the mortgage and usually grows in the early yearrs. Consequently, the equity or investment that the mortgage has in this wraparound will grow as it generates interest, that is not paid, and then begin to decline as the principal is paid.