The effective yield to the Investor would be 10
Option 1: The Investor can offer to hold a standard “second mortgage” in the amount of $371, at an agreed upon rate close to market rates for second mortgage loans (perhaps, 10.5%), amortized over an agreed upon period (say, 20 years with a 15 year balloon) and buyer can assume or take subject to the existing first Mortgage bearing interest at 6.25%. In this case, the Buyer would get the benefit of the lower interest rate on the first Mortgage, while paying a 10.5% market rate of interest on payday loans in ME the second mortgage; or
Option 2: the Investor might offer the Buyer a “wrap-around mortgage” for the entire amount being financed ($1,650,000) at a below market interest rate for a first mortgage loan with interest of, say, 9% on the entire amount, amortized over 20 years with a 15 year balloon.
If Option 1 is chosen, the Investor will receive at closing the sum of $550,000 in cash, and will “hold paper” for $371, secured by a second mortgage, earning 10.5% interest per year, generating a monthly payment of $3,, and a final balloon payment of $172, in 15 years. 5%.
If Option 2 is chosen, the Investor will receive at closing the sum of $550,000 in cash, and will “hold paper” for $1,650,000 bearing interest of 9% (desirable to Buyer because it is .5% less than market, and results in a monthly payment of only $14,, an amount $ per month less than available at the hypothetical current market rate of 9.5%). Of the $1,650,000 held by Investor, only $371, represents funds actually “loaned” by Investor .
There is no legal reason a Bank or other lender could not be the wrap-around Mortgagee under similar circumstances provided it is not prohibited by regulatory mandate or internal loan policies from securing loans through use of a “junior mortgage”
At first glance, it may seem that these funds will earn interest at only 9% instead of 10.5% available under Option 1, but consider further: Through use of a wrap-around mortgage, the Investor would also earn a 2.75% return on funds of the original lender because of the spread between the 6.25% interest rate on the first mortgage loan and the 9% interest rate on the wrap-around mortgage loan. Continue reading …