Scott Bush

As my wife and I continue to pursue our real estate investments, we often hear terms that are either unfamiliar or only vaguely understood. To ensure I’ve actually learned these terms, I’m going to post each term and its definition. And since the concept behind a term is usually more important than simply its definition, I’ll come up with a brief scenario or example to help put it into context.

I’ll start this series with the term wrap-around mortgage.

Wrap-around mortgages are a kind of seller financing. It is so named because it’s a new mortgage the covers (or “wraps around”) an existing mortgage, plus an additional amount. Typically, the wrap-around mortgagee would make a payment and out of that amount, the first mortgage would be paid with the difference being income to the seller offering the financing.

An example: My house is now worth $100,000 and I owe $65,000 on a mortgage. I sell the house for $100,000 with $10,000 cash down and I offer to carry the buyer’s mortgage for $90,000. The buyer’s payment covers my original mortgage’s payment and leaves additional amount. This is beneficial to me because of the differences in the interest rates. Suppose my $65,000 loan was at 6.5%, but the new $90,000 loan I offer is at 9%. I earn not only the 9% on the $25,000 residual between my original mortgage and the new amount, but also on the 2.5% interest rate differential on my $65,000 mortgage.

There is a lot more to this topic, and I’m not sure I fully understand how I’d put it into practice. There’s the whole issue of mortgages not being assumable (though I’ve heard this often isn’t enforced as long as the bills are being paid), among others. Read more at Wikipedia or Google’s definitions.