Wrap Around vs. Subject To

In the realm of real estate, various creative financing techniques can pave the way for unique transactions. Two such methods, wrap-around mortgages and subject-to financing, offer distinct approaches to structuring deals.

Embracing the 'Wrap' Around Existing Financing

A wrap-around mortgage, often termed an "all-inclusive mortgage" or "wrap loan," is a form of seller financing. It involves the creation of a new mortgage that envelops the existing one. In essence, the buyer makes payments to the seller for the wrap-around mortgage, which includes the balance of the original mortgage and an additional amount representing the sale price. The seller then continues to make payments on the original mortgage.

‍

Key Aspects of a Wrap-around Mortgage

Creation of a New Mortgage

‍The seller establishes a new mortgage, encompassing the outstanding balance of the existing mortgage and an additional sum representing the property's sale price.

Payments from Buyer to Seller

‍The buyer remits monthly payments to the seller for the wrap-around mortgage, covering both the original mortgage balance and the additional purchase amount.

Seller's Responsibility

‍The seller remains responsible for making payments on the original mortgage, using the funds received from the buyer to do so.

‍

Subject-To Financing: Stepping into the Shoes of the Seller

Subject-to financing, on the other hand, involves a different approach. In this scenario, the buyer acquires the property "subject to" the existing financing. This means that the buyer takes over the existing mortgage, but it remains in the seller's name. The buyer is responsible for making the mortgage payments, while the seller's name remains on the loan.

‍

Key Aspects of Subject-To Financing:

Transfer of Ownership and Responsibility

‍The buyer takes ownership of the property, but the original mortgage remains in the seller's name. The buyer assumes responsibility for making the mortgage payments.

Seller's Existing Mortgage

‍The seller's original mortgage terms, including interest rates and repayment schedule, remain in place.

Potential Risks

‍Since the original mortgage stays in the seller's name, they retain ultimate liability for the loan. If the buyer defaults on payments, it could negatively impact the seller's credit.

‍

Wrap-around Mortgages vs. Subject-To Financing

Ownership and Responsibility

• In a wrap-around mortgage, the seller maintains ownership of the original mortgage and is responsible for making payments.
• In subject-to financing, the buyer takes ownership of the property and is responsible for making payments on the existing mortgage.

Risk and Liability

• In a wrap-around mortgage, the buyer's default doesn't directly affect the seller's credit, as they continue making payments on the original mortgage.
• In subject-to financing, the seller remains ultimately liable for the mortgage, which can pose risks if the buyer defaults.

Flexibility and Negotiation

• Both strategies offer room for negotiation on terms, but subject-to financing may provide more flexibility in certain aspects.

‍

In conclusion, wrap-around mortgages and subject-to financing are distinct methods of structuring real estate transactions. Each offers its own set of advantages and considerations. Understanding the differences between these financing strategies empowers individuals to make informed decisions in their real estate endeavors. Whether opting for a wrap-around mortgage or subject-to financing, careful consideration of the implications and risks is paramount for success in real estate transactions.

Disclaimer: This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.