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Wraparound Financing
A wraparound financing (trust deed) deed also is called an all inclusive trust deed. There are times when it is
impossible to for borrowers to refinance an existing loan on investment real estate to raise additional capital. With a wraparound loan the existing loan is not disturbed. The seller continues to make the payments on the existing mortgage while giving the borrower the new, increased loan, usually at a higher rate. The new loan is for the amount due on the existing loan plus the amount of the seller's equity being financed.
$180,000 wraparound loan at 9%. $90,000 seller's equity 9%
In the above case the seller receives 9% on his or her equity plus 2% differential on the 7% being paid on the existing loan. This gives seller 11% on his or her equity. In addition, because the seller continues to make the payment on the $90,000 loan, the seller knows that the payments are being made. If the seller had allowed the buyer to assume the existing loan, then the buyer, not the seller, would have taken advantage of the low financing.
To use the wraparound loan, loan must not have a due-on-sale clause. A due on sale clause accelerates loan payments making the entire loan amount due upon a sale. These clauses are enforceable be lender.
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