Definition
A wraparound mortgage is a type of seller financing in which the seller provides a new mortgage to the buyer that “wraps around” the seller’s existing loan. The buyer makes payments directly to the seller, who continues paying their original mortgage. This allows buyers to purchase property with more flexible terms while the seller earns additional interest on the financing.
Explanation
A wraparound mortgage is a secondary loan where:
- The seller retains their existing mortgage and remains responsible for paying it.
- The buyer finances the purchase through the seller, often at a higher interest rate.
- The buyer makes monthly payments to the seller, who then continues making payments on the original loan.
Wraparound mortgages are common when buyers cannot qualify for traditional financing or when sellers want to offer a more attractive purchase option without paying off their existing loan first.
Key Features of a Wraparound Mortgage:
- Blends the existing loan with a new buyer’s loan.
- Seller acts as the lender and collects payments from the buyer.
- Interest rate is often higher than the original mortgage, allowing the seller to profit from the financing.
- Typically used in seller financing arrangements, where the seller maintains legal control over the mortgage.
Example of a Wraparound Mortgage
A seller has a $200,000 mortgage at 4% interest but wants to sell their home for $300,000. Instead of the buyer securing a new loan, the seller offers a wraparound mortgage:
- The buyer agrees to pay 6% interest on the $300,000 wraparound loan.
- The seller continues making 4% mortgage payments on their existing $200,000 loan.
- The seller profits from the 2% interest difference on the extra $100,000 financed.
✅ Advantages:
- Easier financing for buyers who may not qualify for a traditional mortgage.
- Sellers earn extra interest income.
- Allows properties to sell without requiring immediate loan payoff.
❌ Disadvantages:
- If the buyer stops making payments, the seller remains liable for the original loan.
- The lender may have a “due-on-sale” clause, forcing the seller to pay off the mortgage in full.
- Higher risk for both parties if the transaction isn’t legally structured correctly.