A wraparound financing (trust deed) deed
also is called an all inclusive trust deed. There are times when it
is
impossible to for borrowers to refinance an existing
loan on investment real estate to raise additional capital. With a
wraparound loan the existing loan is not disturbed. The seller
continues to make the payments on the existing mortgage while giving
the borrower the new, increased loan, usually at a higher rate. The
new loan is for the amount due on the existing loan plus the amount
of the seller's equity being financed.
Assume a property is being sold for $200,000 with
$20,000 down. Also assume there is $90,000 trust deed against the
property at 7% interest. If the buyer is wiling to pay 9% interest,
the seller could take advantage of this interest difference with a
wraparound loan.
$90,000
loan
7%
$180,000 wraparound loan at 9%.
$90,000 seller's equity 9%
In the above case the seller receives 9% on his or her
equity plus 2% differential on the 7% being paid on the existing
loan. This gives seller 11% on his or her equity. In addition,
because the seller continues to make the payment on the $90,000
loan, the seller knows that the payments are being made. If the
seller had allowed the buyer to assume the existing loan, then the
buyer, not the seller, would have taken advantage of the low
financing.
To use the wraparound loan, loan must not have a
due-on-sale clause. A due on sale clause accelerates loan payments
making the entire loan amount due upon a sale. These clauses are
enforceable be lender.
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