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Sellers across the U.S. are able to find buyers quickly, offering well above the asking price because of the low-interest rates since the last year and the demand for housing, often with offers.
During the time when interest rates are high and housing demand is low, homeowners may struggle to find a buyer that is when they have the option of offering a wraparound mortgage to entice buyers.
A wraparound mortgage is a seller financing offered by homeowners that features a below-market interest rate.
These mortgages are a way for a seller to provide financing to a borrower whose credit score doesn’t allow them to obtain traditional financing.
Wraparound financing is not very common in today’s market.
What Is a Wraparound Mortgage?
The seller maintains the original loan and allows the buyer to wrap seller financing around it where the buyer makes payments directly to the seller, who then uses part of the money to make their original mortgage payment.
In the early 1980s when interest rates were well into double digits the wraparound mortgages were widely used.
Before pursuing a wraparound mortgage, it’s important to fully understand the risks and benefits of the situation.
There are benefits and also some risks to both the buyer and seller in this type of transaction.
Advantages are
- The sellers can find buyers easily during a difficult market.
- They are lucrative to buyers when the rate of interest is high and the seller is offering wraparound financing at a lower rate.
The risk being
- It is riskier for sellers because they are relying on the buyer to make monthly mortgage payments
- Even though they do not technically own the home they have an outstanding mortgage.
- Their credit is at risk if the loans are not paid
- If the buyer stops paying the seller would need to pay out of his pocket
In high-interest rate environments, this mortgage is useful.
Everything has its own risk and benefits but if all goes smoothly it is a win-win situation for both the buyer and seller.
Reference Source: Time
