Definition
An All-Inclusive Deed of Trust (AITD), commonly known as a Wraparound Mortgage, is a method of financing property wherein the seller issues a new mortgage that includes, or “wraps around,” the existing mortgage. The borrower makes payments on the new (wraparound) mortgage, and the seller, in turn, continues to make payments on the original mortgage. This type of financing arrangement can be advantageous in situations where traditional loans may be difficult to obtain or where lower interest rates are desired.
Wraparound Mortgages are typically used as a creative finance option to support real estate transactions, particularly in market conditions where conventional financing is challenging or less favorable.
Examples
Example 1: Lower Interest Rates
Suppose Jane wants to sell her home, but the current market interest rates are higher than her existing mortgage’s rate. To facilitate the sale, she could offer Bob a Wraparound Mortgage where Bob agrees to a loan at an interest rate negotiated between them, which is lower than the current market rate but higher than Jane’s original mortgage rate. Bob benefits from lower interest payments, while Jane benefits from the spread in interest rates.
Example 2: Facilitating a Sale
Mike wishes to sell his investment property during a time when lenders are strict with issuing new loans. He decides to provide an All-Inclusive Deed of Trust to the buyer, Sara. Sara agrees to a wraparound mortgage, making it easier for her to acquire the property without going through stringent conventional loan processes.
Frequently Asked Questions (FAQs)
1. What are the advantages of an All-Inclusive Deed of Trust?
- It allows buyers and sellers to circumvent traditional financing hurdles.
- Sellers can earn an interest rate spread.
- Buyers might secure a lower interest rate than available elsewhere.
2. Are there risks associated with a Wraparound Mortgage?
- Yes, if the seller fails to make payments on the original mortgage, the property could face foreclosure.
- Legal and compliance issues can arise, particularly if the due-on-sale clause of the original mortgage is triggered.
3. Can wraparound mortgages be used for commercial properties?
- Yes, while more common in residential transactions, wraparound mortgages can also be applied to commercial properties.
4. How is the payment structure in a Wraparound Mortgage?
- The buyer makes monthly payments to the seller based on the terms of the wraparound mortgage, and the seller uses part of these proceeds to meet their obligations under the original mortgage.
Assumption of Mortgage: A financing arrangement where the buyer agrees to assume the responsibility for an existing mortgage as part of the purchase price terms.
Subordination Clause: A provision in a mortgage that allows a new mortgage to take precedence over an existing mortgage.
Due-on-Sale Clause: A provision in a mortgage that gives the lender the right to demand full repayment of the loan if the property is sold.
Online Resources
References
- Brueggeman, William B., and Fisher, Jeffrey D. “Real Estate Finance and Investments”. 15th Edition, McGraw-Hill Education, 2015.
- Geltner, David, et al. “Commercial Real Estate Analysis & Investments”. 3rd Edition, OnCourse Learning, 2013.
Suggested Books for Further Studies
- “The Real Estate Wholesaling Bible” by Than Merrill
- “Real Estate Investing For Dummies” by Eric Tyson and Robert S. Griswold
- “The Millionaire Real Estate Investor” by Gary Keller
Real Estate Basics: All-Inclusive Deed of Trust Fundamentals Quiz
### Can an All-Inclusive Deed of Trust help buyers obtain lower interest rates?
- [x] Yes, it can provide lower interest rates compared to current market conditions.
- [ ] No, it always has higher interest rates.
- [ ] Only if the existing mortgage has a very high rate.
- [ ] No, interest rates are dictated by statutory regulations.
> **Explanation:** An All-Inclusive Deed of Trust can sometimes offer interest rates that are lower than current market rates because the terms are negotiated between the buyer and seller directly.
### Who continues to make payments on the original mortgage in an All-Inclusive Deed of Trust?
- [ ] The buyer
- [x] The seller
- [ ] The lender
- [ ] A third-party
> **Explanation:** In a wraparound mortgage, the seller continues to make payments on the original mortgage using the payments received from the buyer.
### What key risk do buyers face with wraparound mortgages?
- [ ] Property depreciation
- [ ] High interest rates
- [x] Seller default on the original mortgage
- [ ] Increased property taxes
> **Explanation:** Buyers risk losing the property if the seller defaults on the original mortgage, as it can lead to foreclosure.
### Why might sellers opt to use an All-Inclusive Deed of Trust?
- [x] To earn an interest rate spread
- [ ] To avoid paying property taxes
- [ ] To decrease the property's market value
- [ ] To eliminate the need for property insurance
> **Explanation:** Sellers may benefit from the excess interest rate earned on the wraparound mortgage compared to their existing mortgage interest rate.
### Can a wraparound mortgage bypass traditional lender financing?
- [x] Yes, it can eliminate the need for traditional lender financing.
- [ ] No, it still requires a lender's approval.
- [ ] Only in specific states with unique laws.
- [ ] No, it is subject to the same rules as traditional mortgages.
> **Explanation:** Wraparound mortgages are direct agreements between the buyer and seller, often bypassing traditional lender financing requirements.
### What is one major legal consideration with wraparound mortgages?
- [ ] Environmental zoning laws
- [ ] Local building codes
- [ ] HOA regulations
- [x] The due-on-sale clause of the original mortgage
> **Explanation:** The due-on-sale clause can be a significant legal issue as it may give the lender rights to demand payment in full if the property is sold.
### Which term refers to a buyer taking over the seller's existing mortgage?
- [x] Assumption of Mortgage
- [ ] Vendor Take-Back Mortgage
- [ ] Reverse Mortgage
- [ ] Refinancing
> **Explanation:** An Assumption of Mortgage arrangement involves the buyer taking legal responsibility for the seller's existing mortgage.
### Wraparound mortgages are most beneficial in what kind of market condition?
- [ ] Bear Markets
- [x] Tight Lending Environments
- [ ] Rising Property Prices
- [ ] Stabilized Equity Markets
> **Explanation:** Wraparound mortgages are particularly beneficial in tight lending environments where access to traditional mortgage lending is restricted.
### What characteristic of the original mortgage impacts the feasibility of a wraparound mortgage?
- [x] Presence of a due-on-sale clause
- [ ] Type of construction material used
- [ ] Number of stories in the property
- [ ] Style of architecture
> **Explanation:** The feasibility of a wraparound mortgage is significantly impacted by the due-on-sale clause, which can be triggered by the property sale.
### In addition to buyer payments, what does the seller benefit from in a wraparound mortgage?
- [x] Earning an interest rate differential
- [ ] Achieving property tax deductions
- [ ] Elimination of property management responsibilities
- [ ] Gaining additional equity ownership
> **Explanation:** The seller benefits from the interest rate differential earned on the wraparound mortgage when the agreed-upon rate exceeds the original loan rate.
