Wrap Mortgages Explained
Wraparound mortgages (wraps) have recently regained popularity in creative finance real estate transactions.
Wraps are a form of seller financing in which an underlying lien remains in place (similar to a subto transaction).
Wraps may act as a “passthrough” for the existing loan with no change to the terms and balance, or they may act as a “container” which holds the existing loan(s) and a markup in principal balance and/or interest rate.
Wraparound Mortgage
A wraparound mortgage is a form of financing in which an existing loan(s) is incorporated (wrapped) into a new loan of same or greater value and same or greater interest rate.
Functionally, the buyer makes payments to the seller, who then continues to pay their original mortgage and keep any difference (if any). The actual payment arrangement may vary.
Mirror Wrap - The Passthrough
A mirror wrap is also known as an exact wrap. There is no markup of the principal amount or the interest rate. This is contrasted to a plain subto transaction in that it gives the seller a lien position so they can foreclose if the buyer doesn’t make payments. In a subto transaction, there’s no such protection for the seller.
In a mirror wrap, the seller doesn’t make any monthly profits. It’s effectively a passthrough construct.
Equity Wrap - Increasing the Principal Balance
In an equity wrap, a portion of the seller’s equity is financed in addition to the underlying debt (mortgage).
In this arrangement, the seller becomes the lender and provides financing to the buyer. The seller earns interest on the portion of the loan amount that’s higher than the bank debt. For example, a $200K wrap mortgage may contain $150K bank financing and $50K seller equity.
In this scenario, the interest rate on the combined loan balance may be higher than that of the first mortgage(s).
Rate Wrap - Increasing the Interest Rate
In a rate wrap, the balance of the underlying loan(s) aren’t changed, but the interest rate is increased. This drives up the monthly payment, and the seller keeps the difference between the original mortgage payment and the incoming payment from the buyer.
Comments (5)
This is a good explanation of the different types of wraps that create financing without a bank while keeping the underlying lien in place.
Raushanah Glinton, about 1 year ago
Thanks for posting Caleb! I think adding some examples would be good as well!
Yu Liu, about 1 year ago
Caleb,
Thanks for posting this! I'm a new realtor, investor, & developer in the Colorado area & am highly interested in using creative financing for investments & clients!
I do have a couple questions.
When you mention seller equity, are you stating the additional amount agreed upon or a "sales price"? In your example, the seller owes 150k on their mortgage but wants to "sell" for "200k", so that would mean they're making 50k on top of any interest change. Is that 50k "seller equity" another term for the difference between the sales price vs amount owed on the seller's mortgage?
To summarize:
A mirror wrap is an assumption without letting the bank know. In an assumption the bank will qualify the buyer, possibly change the interest %, & may not release the seller. A mirror & an assumption both have doc/title/contracts fees associated. If a due on sale is called you can then try an Installment Land Contract but that doesn't provide title, it provides equitable title once the mortgage is fully paid, which buyers may not desire.
Equity Wrap: Sales Price above what the seller owes, no interest change
Rate Wrap: Rate changed, but sales price is equivalent to amount seller owes on mortgage.
A generic Wrap-Around would usually incorporate an equity & rate wrap as terms & sales price are negotiated right?
A mirror is an assumption without bank approval.
I'm trying to make sense of this as best as possible, any inputs would help.
I appreciate your time & awesome post Caleb
We look forward to your success & prosperity.
Ownership is Freedom.
R. Mercedes
Rafael Mercedes, about 1 year ago
Caleb,
Thanks for posting this! I'm a new realtor, investor, & developer in the Colorado area & am highly interested in using creative financing for investments & clients!
I do have a couple questions.
When you mention seller equity, are you stating the additional amount agreed upon or a "sales price"? In your example, the seller owes 150k on their mortgage but wants to "sell" for "200k", so that would mean they're making 50k on top of any interest change. Is that 50k "seller equity" another term for the difference between the sales price vs amount owed on the seller's mortgage?
To summarize:
A mirror wrap is an assumption without letting the bank know. In an assumption the bank will qualify the buyer, possibly change the interest %, & may not release the seller. A mirror & an assumption both have doc/title/contracts fees associated. If a due on sale is called you can then try an Installment Land Contract but that doesn't provide title, it provides equitable title once the mortgage is fully paid, which buyers may not desire.
Equity Wrap: Sales Price above what the seller owes, no interest change
Rate Wrap: Rate changed, but sales price is equivalent to amount seller owes on mortgage.
A generic Wrap-Around would usually incorporate an equity & rate wrap as terms & sales price are negotiated right?
A mirror is an assumption without bank approval.
I'm trying to make sense of this as best as possible, any inputs would help.
I appreciate your time & awesome post Caleb
We look forward to your success & prosperity.
Ownership is Freedom.
R. Mercedes
Rafael Mercedes, about 1 year ago
This is a FANTASTIC explanation of wraparound mortgages! CLEAR, CONCISE, and SIMPLE!
Thank you, Caleb!
Travis Craig, about 1 year ago