This is a form of Seller financing. The seller leaves the existing mortgage in place (assuming it is below market rate) and takes back a second mortgage that “wraps” or includes the amount of the first mortgage.
For example:
Sales price = $5 million
1st Mortgage principal balance = $2 Million at 5%
Current Rate = 8%
Seller offers a “take back” mortgage of $4.5 Million at 6.5% (1.5% spread on $2 Million)
Purchaser pays the seller 6.5% per year on $4.5 Million ($292,500 annual interest)
Seller pays the bank $100,000 per year ($2 Million * 5 %)
Pros:
The Seller has mad his property more salable by providing a below market interest rate.
The Purchaser is paying an undermarket interest rate and did not have to get an instutional loan.
