What is a wrap in creative financing?
A wrap, also known as a "wrap mortgage," is a type of creative financing strategy used in real estate transactions. It involves adding a second mortgage onto a property in order to "wrap" around the original mortgage, allowing the borrower to access additional financing without having to refinance their existing mortgage.
In a wrap mortgage, the borrower takes out a second mortgage in addition to their existing mortgage. This second mortgage is used to pay off the balance of the original mortgage, and the borrower then makes payments on both mortgages to the lender of the wrap mortgage. The wrap mortgage lender is responsible for making the payments on the original mortgage to the original lender, which is why the wrap mortgage is sometimes referred to as a "wraparound" mortgage.
One advantage of a wrap mortgage is that it allows the borrower to access additional financing without having to refinance their existing mortgage, which can be a lengthy and costly process. This can be particularly beneficial for borrowers who are unable to refinance due to credit issues or other factors.
Another advantage of a wrap mortgage is that it may allow the borrower to negotiate a lower interest rate on the second mortgage, which can help to lower their overall monthly mortgage payments. However, it's important to note that wrap mortgages can be complex and may involve higher fees and interest rates compared to traditional mortgages.
Wrap mortgages are not suitable for all borrowers, and it's important to carefully consider the risks and benefits before entering into a wrap mortgage agreement. It's also important to work with a reputable lender who is experienced in wrap mortgages and can provide guidance and support throughout the process.
Overall, a wrap mortgage can be a useful tool for borrowers who need additional financing but are unable to refinance their existing mortgage. By understanding how a wrap mortgage works, borrowers can make informed decisions about whether this type of financing is right for their needs.