What is 'Wraparound Mortgage'
A wraparound mortgage is a type of loan that gives a borrower financing to buy property without paying off the existing mortgage on the property all at once. The new lender (typically the seller of the property but sometimes another lender) assumes the payment of the existing mortgage and provides the borrower with a new, larger loan, usually at a higher interest rate.
A wraparound mortgage is also known as a wraparound loan, wrap loan, overriding mortgage, or all-inclusive mortgage.
BREAKING DOWN 'Wraparound Mortgage'
A wraparound mortgage is used frequently as a method of refinancing property or financing the purchase of property when an existing mortgage cannot be paid off. The total amount of a wraparound mortgage includes the previous mortgage's unpaid amount plus the additional funds required by the borrower. The borrower makes payments to the new lender on the larger loan, and the new lender makes payments on the original loan. If the interest rate on the wraparound mortgage is greater than the interest rate on the original mortgage, the new lender will make a profit on the wraparound mortgage.
For example, a seller owns a house and is paying a $50,000 mortgage on it at 4 percent interest. The seller sells this house to a buyer for $80,000. The buyer obtains a mortgage--either from the seller or from another lender— for $80,000 at 6 percent interest. The buyer (or the lender, if the loan comes from another lender) makes payments to the seller, who uses those payments to pay the original mortgage at 4 percent. The seller makes a profit both in the difference between the purchase price and the original mortgage and in the difference in the amount of the two interest rates. The ownership of the house is transferred to the buyer, and if the buyer defaults on the mortgage, the lender may foreclose on the property.
Wraparound Mortgage vs Second Mortgage
Both wraparound mortgages and second mortgages are forms of seller financing. However, a wraparound mortgage includes the original mortgage in the new mortgage payment, while a second mortgage pays off the original mortgage and then takes out another mortgage to make up the difference between the amount of the original mortgage and the sale price. In both cases, ownership of the property is transferred to the buyer. Which one a buyer chooses depends on how easy it is for the buyer to obtain financing as well as other factors including seller preference.
For example, if the original mortgage was for $50,000 and the sale price of the house was $80,000, a wraparound mortgage would be one mortgage taken out for $80,000 and paid to the seller, who would pay the original mortgage out of the monthly payment from the buyer. A second mortgage would involve the buyer taking out a mortgage for $50,000, paying off the original mortgage and making payments on that new $50,000 mortgage to the lender, then taking out a second mortgage from the seller for $30,000 and paying that off to the seller.