What If Rates Don’t Fall? WRAP-AROUND MORTGAGES
“… I remember my first mortgage back in 1982, when my rate was 15%!” said every boomer ever…
“… I remember my first mortgage back in 1982, when my rate was 10%!” said my law school professor…
The above two comments are huge reminders that homes still sell in even the highest of interest rate environments – even in 1982 when rates averaged 15%!
And that in turn is a great reminder to everyone who thinks 7% or 8% rates mean real estate Armageddon, because they don’t.
I don’t think we will see 7% or 8% for a long time, but I will address that at the bottom of this blog.
For the purposes of this blog though, the primary point is – why did my law school professor get a 5% lower rate when he was no more qualified than anyone else?
Wrap-Around Mortgages = The Ultimate Win/Win
A wrap-around mortgage is a home loan that allows the seller to maintain her existing mortgage while the buyer’s mortgage “wraps” around the existing amount owed. And that is what my law school professor used to finance his first purchase, and it is why his rate was 5% lower than everyone else’s.
In round numbers, this is how a wrap-around mortgage works.
If a seller has a $500,000 home and a $400,000 mortgage at 5% when the average market rate is 10% – the seller can offer a “wrap-around mortgage” at 8% as an additional enticement to buy her home.
The buyer would give a $100,000 down payment to the seller and record the purchase, and then make mortgage payments to the seller. The seller would in turn still make mortgage payments to the original note-holder.
The buyer would love this because she will get a rate 2% below market, and the seller will love this because she both gets to make her sale more enticing and earn 3% on the $400,000 with no money out of pocket (an infinite return 😊). I want to emphasize that again, the seller is not loaning any personal funds, but she is still earning 3% against the entire remaining mortgage balance.
This is why wrap-around mortgages are true “win/win” scenarios, and it is why we will likely see them resurface if rates do not come down.
Am I in “The Rates Won’t Fall” camp?
Hell no (see yesterday’s blog). But – a lot of people are convinced rates won’t come down, and those people should read today’s blog about homes selling in 1982 and about wrap-around mortgages. If they get a mortgage today and rates climb, their home will only be worth that much more later on – if they offer a wrap around mortgage when they sell.
“Jay – what about ‘Due On Sale’ clauses coming into play when sellers sell their homes via a wrap; won’t the original mortgage lenders call the loan due?”
That is the question many people will ask, and my answer will be… “maybe, but I have seen many informal wrap-round mortgages and seller-carry loans over the years, and I have yet to see a loan get called due as long as payments continue to be made in a timely manner.”
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