How Bankers Make Money
Actually, it’s not really a secret at all. In fact, bankers have been doing this for over a hundred years. Bankers make money by borrowing at low interest rates, then lending at higher interest rates. You deposit money in a saving account and they pay you 3% interest. They lend the same money back to you for home loans at 7% or more. The "spread" between the interest rate they pay and the interest rate they collect amounts to incredible profit!
Consider this simple example: You are shopping for rates to refinance your home loan. A lender quotes you 6% interest. On a $100,000 loan, the monthly payment (amortized over 30 years) is about $630 per month. However, at the last minute someone at the bank decides that the color of you underwear isn’t right, so your interest rate changes to 6.25%. Your monthly payment will now be $642. You aren’t terribly upset, since, after all, what’s $12 per month? What you don’t realize is that the extra ¼ percent amounts to over $6,000 in additional interest! An incredible opportunity in Today’s Market We are in a unique time in history in that real estate prices are rising, yet interest rates are dropping. This means that those who can borrow at low interest rates and loan at higher interest rates are making a bundle! Combine the interest rate "spread" and the "buy low, sell high" principle and your profit grows exponentially.
The "Wrap Around" mortgage comes into play
Consider this example: Micheal buys a $100,000 house for a 10% discount ($90,000). He borrows 90,000 from First Federal Financial on a favorable 8% thirty-year loan. His principal and interest payments are roughly $694 per month. He sells the property to "John Doe" on an installment land contract for $110,000 (about 10% above market), taking $10,000 down and carrying the balance of $100,000 at 11% for thirty years. He does not pay off the underlying loan, but rather collects payments ($958/month) from Becky on a monthly basis and continues to make payments on the underlying loan. He collects $344/month cash flow on the "spread" for 30 years!
This is a basic example of a "Wrap Around" mortgage. The existing loan remains in place, and a new loan is created which wraps around the existing loan. Micheal makes a profit on both an interest rate spread and a markup on the purchase price. People with poor credit rarely question the price of the property (especially since they do not have to qualify for the loan). When the new buyer pays off the remaining balance, Susie pays off the underlying loan. In the meantime, she makes monthly cash flow on the spread between the interest she pays and the interest she collects. This cash flow is not offset by property management, maintenance and the aggravation of tenants. There are no vacancies, calls from tenants, city code violations or other headaches to deal with. You can collect your monthly checks for thirty years, or you can sell your "wrap" note for cash!
Good Credit or Huge Sums of Cash not Needed!
If you don’t have the ability to qualify for low interest rate loans, not to worry! You can use partners who have good credit and income. You can take over existing loans with low interest rates, then re-sell the properties on a "wrap". There are multiple ways to make a profit on "wraps", and you don’t need credit, provable income or bundles of cash! If you are looking for an alternative to landlording or a new way to create more cash flow, this is the ticket!
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