A wraparound mortgage is a loan using real estate as collateral

What Is a Wraparound Mortgage?

A wraparound mortgage is a loan using real estate as collateral that has these features:

The wrap loan is a new loan on a property that already has a first mortgage on it.
The interest rate on the first mortgage is usually lower than going rates in the area for first mortgages.
The wrap loan helps you buy the income property with a small down payment, or no down payment at all.
The wrap loan enables you to make just one payment per month that covers both the existing first mortgage and your new loan.
The wrap loan avoids the stigma that sometimes accompanies a second mortgage, even though the wrap loan is in essence a second mortgage.

Example of a Wraparound Mortgage

You, we'll say, want to buy an eight-unit garden apartment house in a lovely area.

The garden apartment house is priced at $275,000. Annual income from the apartment rentals and a laundry room in the basement is $47,000. The annual expenses before mortgage payments total $19,000. This leaves $47,000 − $19,000 = $28,000 per year to pay for the loans you take to buy this garden apartment house.

A down payment of $25,000 is required by the seller. There is a $100,000 first mortgage at 5.75 percent existing on the property. If you buy this well-cared-for garden apartment house you will assume the first mortgage, if you would like to keep it on the property.

You know you can borrow the $25,000 down payment from your credit-card lines of credit. To do so you'll use several credit cards. This means you can acquire ownership of this desirable garden apartment house on zero cash out of your pocket.

Inspecting your prospective purchase you find the garden apartment is in good condition. Little maintenance will be needed when you take it over.

Checking local lenders you find you can get a wraparound mortgage for $250,000 at 6 percent interest for 30 years. Now you "work the numbers.

Working the Numbers for Your Wrap Loan

You can work the numbers for your wrap loan using any of the readily available mortgage interest tables. Or you can do it on the Internet at various loan sites. Lastly, as a subscriber to one of my newsletters, you can fax, e-mail, or postal mail me the numbers and I'll work them for you free of charge. Here's how they'll work for this garden apartment house:

Annual income before nondebt service = $47,000
Annual expenses before debt service = $19,000
Net annual income before debt service = $28,000

Debt Service

Monthly payment on wraparound loan of $250,000 @ 6 percent for 30 years = $1,500
Monthly payment on $25,000 down payment credit-card loan @ 12 percent interest = $556 for a 5-year (60-month) personal loan
Total monthly debt service = $2,056
Monthly positive cash flow = ($28,000/12) − $2,056 = $277.33
Monthly positive cash flow after credit-card loan payoff = $277.33 plus $556 = $833.33

"So, you say, "I take out $275,000 in loans to make $277.33 per month. Does that make any sense? Isn't it very risky? The answers, good friend of mine are:

Does it make any sense? Yes, if you want to acquire $1 million in real estate in one year on borrowed money.
You are, after all getting a return of $277.33 per month on borrowed money none of the money you put up comes from your bank account.
Is it risky? Yes, IT IS RISKY. But when you're starting your career, risk is almost always necessary, especially when your capital is limited, or nonexistent.

Now for more details on your wrap loan for the eight-unit garden apartment house described earlier.

When you make your $1,500-per-month payment on your $250,000 wrap loan, your lender pays $584.00 of that on the $100,000 existing 5.75 percent loan on the property.
Your total monthly payments of $2,056 come from the monthly rents you receive for the eight units in the garden apartment house. So no money comes out of your pocket.
As time passes you will probably be able to raise the rents, increasing your monthly Positive Cash Flow (PCF).
Your equity (ownership) in the property increases with every monthly payment you make on your wrap loan.Why? Because you're paying down both mortgages (the $100,000 and the $150,000, along with your down payment loan).

1. Indirect positive effects residential construction
In addition to providing direct effects on a national economy, residential construction can also have major indirect effects through backward linkages with industries that ...

2. How to obtain a firm yes from your business partner
The magic of getting the other one to agree John looked out across the room. "We so often think about negotiation only in terms of buying a property and selling...

3. Beware of these ten fatal business analysis errors
Error 1: Taking too long Good businesses don't wait around for indecisive people. Many people "think a business to death." The best way I know to lower your anx...

4. What types of contracts are used in real estate
Eight Key Contract Clauses when buying an investment property In real estate you need a set of "standard" contracts to use when you are buying and a second set ...

5. Assure yourself against a high pressure closing
Three Ways to Protecting Yourself from a High-Pressure Closing You are most vulnerable for the other party to nibble concessions from you at the closing table. ...

6. Housing finance has risen to the top of urban policy
Housing Finance and Development Housing finance has risen to the top of urban policy and research agendas in recognition of the role that it can play in the del...

7. Your Key Ideas for Using Wraparound Mortgages
When to Use a Wraparound Mortgage You should consider using a wraparound mortgage whenever you have the following conditions in your real estate wealth building:...

8. Why You Should Use Wraparound Mortgages
Why You Should Use Wraparound Mortgages The wrap mortgage offers you many excellent advantages. As a Beginning Wealth Builder (BWB) you should know why wraparou...

9. Twelve More Ways to Find Low Cost Properties
To make appreciation work for you, you must buy low-cost properties and wait for them to appreciate while you help them rise faster in value by making selected improvem...