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“This video. We re gonna discuss wraparound mortgages so a wraparound mortgage is a type type of seller financing right so the person selling the home in question is actually the buyer and so the sellers mortgage alright. So the seller. Let s say they still owe money to the bank on their mortgage.
That s actually gonna remain intact and they re gonna keep making payments on it and then the new mortgage. Which is going to be extended from the seller to the buyer. That s going to wrap around so to speak. The existing mortgage and cover those payments.
So it s it s kind of a complicated thing to talk about let s actually show an example. Which will make it a little bit easier for you to understand i think so let s say. This is this is you and and you want to buy a home from suze right and you want to pay let s say you determine how i ll pay 200000. For this home.
That s what i think. It s worth right. I want to pay suzy this this money to buy this house and suzy. Oh.
Let s say suzy has an existing mortgage. So i ll put here an existing mortgage. So she still she borrowed money to buy that home right. And she still has money left on that mortgage and let s say that she has an existing mortgage of thirty five thousand and let s say this is two hundred thousand that s what you want to be the sale price right you re willing to pay that so normally what would happen right with a kind of conventional mortgage is you go to the bank.
And you would go to the bank. Let s see here here s the bank you go to the bank. And you say hey i need two hundred thousand dollars or you know let s obviously you d have a down payment and stuff so it wouldn t be the whole two hundred thousand. But let s just say you need two hundred thousand dollars or you need a smile.
So you can buy this house from suzy right and then suzy would take that money right because she s getting paid all this money. She s getting the full full amount right and she would take that and then pay off her own mortgage right after she paid her a real estate broker and so forth so she would just her mortgage is gonna get completely paid off right. She s gonna use the proceeds from from the sale of the house. But let s say that you can t get money from the bank right let s say that there s there s some kind of issue.
The bank won t loan you money for whatever reason you decide that you know what it actually better if i can get financing from suzie right suzie will be willing to lend me this money right. Now suzie s not actually going to give you the. 200 i. Mean it s silly right starting to give you.
200000 and then you just give her 200000. Back. What suzie s actually gonna do is say look you just we all have a mortgage to me right. And i you ll be making payments to me right based on this two hundred thousand plus.
Some interest right so let s say that she says to the mortgage here. So she conveys. She conveys title title of the home to you and she extends a mortgage right or gives a mortgage. And she s giving you a loan and that s that two hundred thousand let s say at the eight point five percent interest.
Now let s just ignore the downpayment and stuff to make things easier right so so it s a eight point five percent interest rate..
She s charging you now what s the advantage to suzie of doing this right. Why is suzie going to say hey you you don t have to pay me the the whole amount upfront you can just go ahead. And i ll finance. This and you just make payments to me.
Why would suzie do that well maybe suzie was having a hard time selling her house maybe. It s kind of not a good market for people like you to get credit and and so susie wants to sell her house faster and she she just decides that you know what this will help me sell my house. Faster and get me you know and and i want to move into this other home so in addition to that if there s rising interest rates. So.
Let s say entra rates are going up. There s also another benefit for susie right and so that benefit is this let s say that remember susie has an existing mortgage of thirty five thousand well let s say that that thirty five thousand dollar mortgage. Is at a rate and that looks terrible is at a rate of let s say. It was seven percent seven percent interest right now susie is continuing to pay her mortgage right.
She s not gonna extinguish her mortgage. Because she doesn t have thirty five thousand dollars to just pay this off right. Because you haven t given her a lump sum. You re giving you re making payments to susie right you re making mortgage payments to susie not to a bank right.
But because she originally had on so her seven percent interest now mortgage rates have gone up. And she s getting eight point five percent interest. So. She s got a spread right because she s still making payments on her existing mortgage right.
That s the whole key right your mortgage with her is going to wrap around her existing mortgage right so she s gonna continue making payments on this thirty five thousand..
But it s at seven percent interest right and then that two hundred thousand and everything that that s including this eight point five percent interest. So she s really making a spread of eight point five minus seven equals. One point five percent interest on this thirty five thousand right because you re paying her eight point five. And it s really.
Seven is all she has to pay so she s making that spread plus. She s making the eight point five on the remaining amount. Right so the the two hundred thousand two hundred thousand. Minus the 35000.
And again. I just ignore things like down payments. Let s just make this simple right so. She s making eight point five percent interest on that and then she s also making this one point five percent interest on her existing mortgage.
So now you say hey look this looks. Great right you had trouble getting financing and now you got financing from the seller. And said having a gift from a bank and susie gets to make this spread on her existing mortgage. And she gets a seller house.
Faster. It s a win win for everybody right well there s one thing to keep in mind. There s a lot of risk for susie right. So there s a lot of risk first of all this that mortgage right has to be what s called assumable and they not have eight.
What s called a due on sale clause..
Right so sometimes like when susie have this in this existing mortgage with her bank. They re probably being some due on sale clause. Which says okay look if you try and convey title to this property. Anybody.
The bank has the right to just demand payment immediately to just accelerate payments and just say look you have to pay us before you can convey title of this home to anybody right now fha loans and va loans historically were assumable and you didn t have you know this kind of issue with the due on sale clause. So you could do a wrap around with that but if you don t have a that kind of loan and it s got to do on sale clause. You might have to work it out with the lender. And and the lender might say no or if you just do this.
Without the lender. Permission. The lender might come in and surprise. You and say hey look we got this due on sale clause.
And you have a problem right. So you ve got some some risk. There on susie s part and then also even if you say okay you know what the loan is assumable. Or that you know the things not going to give us problems to do on sale clause.
There s still risk with susie because what if you don t make payments right. If you don t make payments to susie. Then susie s gonna have an issue and she s not going to be able to pay her existing mortgage in which case. The bank might decide to foreclose and susie would be ” .
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