Should You Offer a Wrap-around Mortgage to Your Homebuyer?
Sellers: considering offering a wrap-around mortgage to your homebuyer? While there are risks, this option often works out better for sellers compared with a cash sale. If you have questions or need recommendations, I am here to help
Wrap-around financing is a type of seller financing used to facilitate the sale of real estate. If the seller has a mortgage, they can continue to pay off their original loan while extending financing to the buyer. The seller’s loan to the buyer “wraps around” the original loan at a higher interest rate than the seller is currently paying, giving the seller a chance for additional profit. The buyer profits by getting a home, often for less than market value, in exchange for paying a higher interest rate to the seller.
The original lender has to give permission for a wrap-around mortgage, as there are risks for all parties. The buyer or seller could default, but in the best case, the seller makes more money than they would have in a cash sale and the buyer gets a home they might not otherwise have been able to afford. Everything else about the transaction is normal—the buyer’s down payment pays both the seller’s and buyer’s real estate agents at closing, just like any other home purchase.
Explains Nolo.com, the buyer and seller sign a promissory note containing the terms of the loan and records a mortgage or a deed of trust with the local public records authority. These loans are typically short term—while the monthly payments may still be calculated as if it were a 30-year loan, it will usually be accompanied with a balloon payoff due in three to five years. By this time, the property may have appreciated, or the buyer may be in a better position to refinance with a traditional lender.
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