 Sam
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 Posted: Thu Apr 08, 2004 12:56 am Post subject: Transferring your liability through wrap-around mortgage |
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A wrap-around mortgage is a loan transaction in which a borrower transfers the liability of paying off the mortgage to a third party. The person, to whom the mortgage is transferred, assumes responsibility of the loan. He pays a higher amount for the loan but the lender quotes him a lower interest rate. The third party then gets the title to the property after he pays down the home loan.
Wrap around mortgage is a kind of owner financing transaction in which the lender may or may not be the seller.
Example: Samuel takes a mortgage loan worth $50,000 at 8% from Georgina, but later on finds that he cannot pay it off. So he consults the lender and then both of decide to sell the loan to John. Samuel loses his property but he could at least avoid a bankruptcy or a foreclosure. John pays off a higher amount, say $80,000 for the mortgage. But Georgina offers him an interest rate of 6%. After paying the off loan, John gets the title to the property.
Wrap-around mortgages are all assumable loans. Nowadays, only FHA and VA loans are assumable without the permission of the lender. The wrap-around mortgage which can be assumed only at the lender's permission carries the due-on-sale clause. This clause requires the mortgage to be paid off in full before the property is sold. Even if the lender allows for the transfer of liability for the mortgage, it will be at the current market rate. So when the market rate rises, the interest rate on wrapping assumable loans also also go higher.
It often happens that a wrap-around deal is carried out on a non-assumable loan. In this case, the lender may demand either the entire payment or a higher interest rate along with a large amount of assumption fee.
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