What Is a Wraparound Mortgage?

A wraparound mortgage is a type of junior loan that wraps or includes the current note due on the propಌer💟ty. The wraparound loan will consist of the balance of the original loan plus an amount to cover the new purchase price for the property.

With a wraparound mortgage, the seller offers financing to a homebuyer to purchase the property. The buyer pays the seller a monthly payment at an agreed-upon 澳洲幸运5开奖号码历史查询:interest rate while the seller uses the proceeds to pay the ori🍌g🌺inal mortgage. 

These mortgages are a form of secondary financing. The seller of the property receives a secured 澳洲幸运5开奖号码历史查询:promissory note, which is a legal IOU detailing the amount due. A wraparound mortgage is also known as a wrap loan, overriding mortgage, agreement for sale, or all-inclusive mortgage.

How a Wraparound Mortgage Works

Frequently, a wraparound mortgage is a method of 澳洲幸运5开奖号码历史查询:refinancing a property or financing the purchase of an꧙other property when an existing mortgage cannot be paid off. The total amount of a wraparound mortgage includes the previous mo🅺rtgage's unpaid amount plus the additional funds required by the mortgage lender.

The borrower makes the larger payments on the new wraparound loan, which the lender will use to pay the original note plus provide themselves a profit margin. Depending on the wording in the loan documents, the title may immediately transfer to the new owner or it may remain with the seller until the satisfaction of the loan.

Since the wraparound is a junior mortgage, a♈ny superior or senior claims will have priority. In the event of default, the original mortgage would receive all proceeds from the liquidation of the property until it is all paid off.

Wraparound mortgages are a form of 澳洲幸运5开奖号码历史查询:seller financing where instead of applying for a conventional bank mortgage, a homebuyer will sign a mortgage with the seller. The seller then takes the place of the bank and accepts payments from the new owner of the property. Most seller-financed loans include a spread on the interest rate charged, giving the seller additional profit.

Wraparound Mortgage vs. Second Mortgage

A 澳洲幸运5开奖号码历史查询:second mortgage is a type of subordinate mortgage made while an original mortgage is still in effect. The interest rate charged for the second mortgage tends to be higher, and the amount borrowed is determined by the equity in the home and is lower than the first mortgage.

A notable difference between wraparound and second mortgages is in what happens to the balance due from the original loan. A wraparound mortgage includes the original note rolled into the new mortgage payment. With a second mortgage, the original mortgage balance and the new price combine to form a new mortgage.

Example of a Wraparound Mortgage

For example, Mr. Smith owns a house that has a mortgage balance of $50,000 at 4% interest. Mr. Smith sells the home for $80,000 to Mrs. Jones, who obtains a mortgage from either Mr. Smith or anothඣer lender at 6% interest. Mrs. Jones makes payments to Mr. Smith, who uses those payments to pay his original 4% mortgage. 

Mr. Smith makes a profit on both the difference between the purchase price and the original owed mortgage and on the spread between the two interest rates. Depending on the loan paperwork, the home's ownership may transfer to Mrs. Jones. However, if she defaults on the mortgage, the lender or a senior claimant may 澳洲幸运5开奖号码历史查询:foreclose and reclaim the property.

The Bottom Line

With a wraparound mortgage, the seller keeps their existing mortgage and enters a mortgage agreement with a buyer to finance the purchase of the home at an agreed-upon amount, 澳洲幸运5开奖号码历史查询:interest rate, and down payment. The buyer pays the seller a monthly payment, while the seller pays the bank or lender. Typically, the interest rate charged to the buyer is higher than the original rate charged to the seller by the bank. As a result, the seller pockets the difference between the two rates. Wraparound mortgages are junior loans that include the current note on the property, plus a new loan to finance the purchase of the property.