While mortgage rates are extremely low in the United States at this time, new mortgages aren’t the only way that you can use to sell your unwanted home in the Tucson area! Let’s discuss a lesser known, yet commonly used method to finance homes in Arizona…the Wrap Around Mortgage! Otherwise known as a “wraparound mortgage” or simply a “wrap.”
There are typically four questions that come up when it comes to a wrap around mortgage, so let’s discuss the ways this can benefit you as a Tucson Homeowner!
What is a “Wrap Around Mortgage?”
A Wrap around mortgage is simply a situation where a home seller issues a loan to a home buyer. In a wrap around mortgage situation, the Homeowner doesn’t retire the original debt or home loan. Instead, they make an additional mortgage that “wraps around” the existing loan. This keeps the Seller’s loan in place, while wrapping the new buyers loan with the Seller around the existing Loan.
How Does A Wrap Around Mortgage Work?
The Seller and the Buyer enter an agreement for the overall sales price of the home. The Buyer makes payments to a local Title Company to ensure that all parties are protected. Depending on the terms of the agreement; the price, the interest rate, and term are all determined in advance.
This enables the parties to know how much being paid to both the existing mortgage, as well as the Homeowner. Let’s take the below example…
Home’s Original Loan Amount $90,000
Home’s Value: $150,000
Monthly Payment $650
A “Wrap Around” Mortgage would look like the following
Offer : $150,000 at 5% interest rate, amortized over 30 years…
Principal and Interest would be $805 per month.
This amount ($805) would be sent to the local Title Company. The original loan payment of $650 per month is taken from the payment, and sent to the mortgage company to keep the mortgage current. Any overage is sent to the Homeowner as their proceeds.
At some predetermined time (usually 3-5 years) the Buyer will typically get a new loan, and pay you off!
Is a Wrap Around Mortgage Legal?
Absolutely! They are generally held as legal and in Arizona, they have been regularly done. Their popularlity has decreased in the last few years due to the prevalance of “due on sale” clauses and a good real estate market.
However, this does not mean that they aren’t done! For those who have properties that are problematic to sell, or difficult to maintain due to distance, or other reasons a Wrap Around mortgage can be a good idea!
What Are The Pros and Cons of A Wrap Around Mortgage?
Honestly, just like anything else.. there is risk in everything. However, the main idea in selling your home with a wrap around mortgage is to minimize your risk. Let’s examine the Cons first.
- Potentially, you could have your “Due on Sale” clause called. Most mortgages these days have a “due on sale” clause which enables the lender to call your note “due and immediately payable” if they feel as though you have transferred the title. It is important to note, it is their right to do so, but there is no guarantee that they will. Remember, banks are in the business of getting money paid.. not holding real estate. So long as you ensure your buyer is paying the mortgage on time, you have a lot of protections going for you.
- Failure of the Buyer to close on the sale at the end of the term. In this case, your only recourse is the property itself. Fortunately, the laws in Arizona are very strict when it comes to people not making payments on real estate contracts. You get the house back.. keep the money you’ve made in the meantime, and sell it again. There is literally no limit to how many times you could sell this and make money. Remember, in this case, you are no longer acting as a homeowner, but as a lender!
- If the subject property has a VA Loan, you won’t be able to use your VA Eligibility again until the property is sold.
- Damage to the property. Literally, the only way to avoid a potential scenario is to sell the property outright. Otherwise, you do your best to ensure you are protected legally as well as with proper insurance. Your Buyer should name you as the insured in case something happens!
- You can sell for a much higher price than you might have otherwise. One of the benefits of this form of financing, is that you get to set a higher than average price. Since the advantage for the Buyer is the Seller Financing, particularly on favorable terms. If you don’t need all your money right away, you can make more money than you might have otherwise!
- You can get paid three ways. First is on any amount of money the Buyer pays you upfront, then the amount of money you pay on the monthly basis, as well as your final payment when the original contract is paid off.
- You can avoid messy Realtor fees, costly repairs, as well as time on the market! For some people, this is perhaps the biggest and most attractive benefit. You can enter into a contract and close within days!
Do You Have More Questions About Wraparound Mortgages?
Feel free to contact me by using the form below, or calling me directly at (520) 403-6227! Get a fast, fair offer on your unwanted Tucson Home today!