Wrap-around mortgages are experiencing a new popularity

Wrap-around mortgages are experiencing a new popularity in today's marketplace. In the 1970s when interest rates were high, wrap-around mortgages were commonplace. Once lending requirements softened and interest rates dropped, the wrap-around mortgage went by the wayside. Now that lending requirements have become more cumbersome and stringent, the "wrap" is experiencing new popularity. At times it becomes the best course of action to "move the deal along." What exactly is a wrap-around mortgage? In accordance with its name, it wraps a subordinate lien against the subject property onto the existing first lien. To explain by example, Seller Corp. has an existing building with an existing $500,000 first mortgage payable to XYZ Bank at 6%. They are offered $1.2 million by Buyer LLC. Buyer LLC comes to the table with $300,000 in cash. Buyer LLC must now seek financing in the amount of $900,000 at, say, 10%. All of the associated closing fees i.e. points to the new lender, mortgage tax (ranging from 1% to 2.8% depending upon where the property is located), mortgage title insurance, appraisal, bank attorney, commercial credit report, new survey, etc. must be paid. Even with good credit Buyer LLC may not be able to obtain financing. The required loan to value and the costs associated with the loan may bring the deal down. This is where the wrap-around mortgage becomes the vehicle of choice to make the transaction happen. The first mortgage payable to XYZ Bank at 6% in the principal amount of $500,000 stays in place. Seller Corp. takes the $300,000 down payment from Buyer LLC and gives Buyer LLC a wrap-around mortgage in the amount of $900,000 at say 8%. Seller Corp. is still obligated to pay the original $500,000 to XYZ Bank, but now holds a wrap-around mortgage in the amount of $900,000 In addition, Seller Corp. is receiving interest on $900,000 at 8% and paying interest to XYZ Bank on $500,000 at 6%. Buyer LLC can purchase the property and is only paying 8% with little or no closing costs. Additional savings are realized as mortgage tax is only due and payable on, the difference between $900,000 and the existing mortgage of $500,000. Buyer LLC pays his monthly payments to Seller Corp. on $900,000 at 8% and Seller Corp. pays XYZ Bank on $500,000 at 6%, retaining the difference. A wrap-around mortgage is much easier to sell on the secondary market than a second mortgage. The investor who purchases the wrap-around mortgage can pay off the existing mortgagee and thereby become a first lien on the property. Wrap-around mortgages are also a great tool for the corporate refinance. Rather than paying off or assigning the first mortgage and consolidating the existing lien with a new mortgage in the amount of the money required, the owner can wrap the new money required around the existing loan. Wrapping the mortgage affords the new lender much more security than giving secondary financing and avoids the borrower having to incur higher monthly payments. As with all real estate transactions, working with a knowledgeable title company and closing attorney is paramount in assuring that the transaction proceeds smoothly. Nan Gill is the president of Gill Abstract, Goshen, N.Y. and New York, N.Y.