Wraparound Mortgage
A type of seller financing where the seller keeps their existing mortgage in place and creates a new, larger mortgage that "wraps around" the original loan. The buyer makes payments to the seller, who continues making payments on the underlying mortgage and keeps the difference.
Example
“The seller offered a wraparound mortgage at 7% interest while continuing to pay their existing 4% loan, creating a profit spread.”
Memory Tip
Picture a burrito wrapped around filling - the new mortgage wraps around the old one, with the seller keeping the original loan inside.
Why It Matters
Wraparound mortgages can facilitate sales when traditional financing is difficult to obtain or when sellers want to earn interest income while helping buyers purchase their property. This arrangement can benefit both parties by avoiding loan assumption fees and qualification requirements.
Common Misconception
Many assume wraparound mortgages are always legal and safe, but they may violate the due-on-sale clause in the original mortgage, potentially triggering immediate loan acceleration.
In Practice
A seller with a $200,000 existing mortgage at 4% interest creates a $300,000 wraparound mortgage at 6% interest for the buyer, who pays $100,000 down. The seller collects 6% on $300,000, pays 4% on $200,000 to the original lender, and profits from the interest rate spread on both portions.
Etymology
Named in the 1970s because this financing method 'wraps around' the existing mortgage like a blanket, encompassing the original loan within a new, larger one.
Common Misspellings
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