What Is a Wraparound Mortgage?

A wraparound mortgage is one kind of junior loan that encompasses the existing note payable on the property. The initial loan sum plus additional funds to pay the property’s new purchase price will make up the wraparound loan. Secondary finance takes the form of these mortgages. A secured promissory note, or formal IOU, outlining the amount owed is given to the property seller. Other names for a wraparound mortgage are wrap loan, all-inclusive mortgage, overriding mortgage, and agreement for sale.

How a Wraparound Mortgage Works

When a current mortgage cannot be paid off, a wraparound mortgage is sometimes used to refinance a home or finance the acquisition of another property. The outstanding balance of the prior mortgage plus any extra cash the lender requires are included in the total amount of a wraparound mortgage. The borrower pays the more significant payments on the new wraparound loan, which the lender uses to cover the old note and keep a profit margin. The title may change hands immediately, or it may stay with the seller until the loan is repaid, depending on how the terms are worded.

It is a kind of seller financing in which the seller acts as the bank’s substitute rather than using a traditional bank mortgage.

All senior or superior claims will precede the wraparound since it is a junior mortgage. All earnings from the sale of the property until the original mortgage is paid in total would be given to the original mortgage in the case of default.

Wraparound mortgages are a kind of seller financing in which the buyer signs a mortgage with the seller rather than applying for a traditional bank mortgage. After that, the seller acts as the bank’s substitute and takes receipt of payments from the property’s new owner. Most seller-financed loans come with an interest rate spread, providing the seller with extra revenue.

Second mortgage vs wraparound mortgage

Seller finance might take the form of second mortgages or wraparound mortgages. One kind of subordinate mortgage formed while the first mortgage is still in force is called a second mortgage. Compared to the first mortgage, the second mortgage often has a higher interest rate and a smaller loan amount.

One significant distinction between second and wraparound mortgages is the treatment of the initial loan amount. The old note is incorporated into the new payment with a wraparound mortgage. A second mortgage creates a new mortgage by combining the first mortgage debt with the new price.

A wraparound mortgage example

For instance, Mr. Smith has a $50,000 mortgage with 4% interest on his home. For $80,000, Mr. Smith sells Mrs. Jones the house. Mrs. Jones then gets a mortgage at 6% interest from Mr. Smith or another lender. Mr. Smith receives funds from Mrs. Jones, and he uses them to settle his first 4% mortgage.

Mr. Smith benefits from the gap between the two interest rates and the difference between the purchase price and the first mortgage balance. Depending on the loan documentation, Mrs. Jones may become the house’s new owner. On the other hand, the lender or a senior claimant may foreclose and seize the property if she fails to pay the mortgage.

Conclusion

• Wraparound mortgages are junior loans that consist of the existing note on the property plus a new loan to pay the property’s purchase price. They are used to refinance real estate.
• The seller holds a secured promissory note in a wraparound or secondary seller financing.
• Usually, a wraparound occurs when an existing mortgage is unpaid.
• When a borrower has a wraparound mortgage, the lender receives a mortgage payment to cover the initial note and keep a profit margin.