Beat high interest rates with wraparound financing

Wraparound financing yields big savings for buyers at the same time as it pays a good return to the seller. Here's a simple example to illustrate how a wraparound works:

Financial Facts

Asking price $200,000

Existing mortgage balance 100,000

Existing mortgage interest rate 6%

Term remaining (years) 20

Monthly payment 716

Current market interest rate 9%

You offer to buy a property for $200,000 if the seller agrees to finance $180,000 at 7.5 percent fully amortized over 20 years. Your payment (P&I) equals $1,450 per month.5 The existing mortgage remains, and the seller will continue to make payments on this loan. To complete the purchase, you sign a land contract, alternatively known as a contract-for-deed or installment note.

Each month the seller collects $1,450 from you and then pays the bank his monthly mortgage payment of $716 for a net gain of $734 ($1,450 less $716). Because the seller has actually financed only $80,000 ($180,000 less

5 You also pay for the property insurance, property taxes, maintenance, and upkeep.

the 100,000 he still owes the bank), he achieves an attractive rate of return on his loan of 11.1 percent.

$80,000

But you gain from this deal, too. Had you financed $180,000 with a bank at the market rate of 9 percent amortized over 20 years, you would pay $1,619 per month instead of the $1,450 that you'll pay to the seller.

In one of my property transactions, I wrapped a 10 percent mortgage with a 13.5 percent note. My yield on the money I left in the property exceeded 18 percent. At the time, current mortgage rates were at 16 percent. So, with a note rate of 13.5 percent, my buyer also got a great deal. This example shows how a wraparound can benefit buyers and sellers—true win-win financing.6

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