Wraparound Mortgage
A wraparound mortgage is a seller-financing arrangement where the seller keeps their existing mortgage in place and issues a new, larger mortgage to the buyer that 'wraps around' the original loan. The buyer makes payments to the seller, who continues paying the original mortgage. The seller profits from the spread between the two interest rates.
Here's how a wraparound works: Seller has an existing $150,000 mortgage at 4%. The home sells for $300,000. Rather than paying off the first mortgage at closing, the seller creates a new $280,000 wraparound mortgage at 7% for the buyer (who puts $20,000 down). The buyer pays the seller $1,862/month on the $280,000 at 7%. The seller continues paying $716/month on the original $150,000 at 4%, pocketing the $1,146 spread plus earning interest on the seller-financed portion above the original balance.
Wraparounds can benefit buyers who don't qualify for traditional financing and sellers who want to generate income and sell quickly. They're most common in commercial real estate and less common residentially due to significant legal risks.
The biggest risk: most residential mortgages have a due-on-sale clause that allows the lender to demand full repayment if the property is sold. A wraparound technically violates this clause—if the original lender discovers the sale, they can call the entire mortgage due immediately. This could force a quick sale or foreclosure. Always consult a real estate attorney familiar with your state's laws before entering a wraparound arrangement.
Key Takeaway
A wraparound mortgage is a seller-financing arrangement where the seller keeps their existing mortgage in place and issues a new, larger mortgage to the buyer that 'wraps around' the original loan. The buyer makes payments to the seller, who continues paying the original mortgage. The seller profits from the spread between the two interest rates.
Related Terms
Frequently Asked Questions
The structure itself is legal, but it likely violates the due-on-sale clause of the original mortgage. If the original lender discovers the wraparound arrangement, they can call the loan due immediately. Wraparounds carry significant legal and financial risk for both parties.
In commercial real estate, where due-on-sale clauses are often negotiated away or where the risk-benefit tradeoff is more favorable. Residentially, it's rare and high-risk. Consult a real estate attorney before attempting one.
The original lender can foreclose on the property, leaving the buyer in a catastrophic position—they've been making payments on a wraparound but lose the home because the seller didn't forward payments to the underlying lender. Protect yourself by requiring payments be made into an escrow account managed by a neutral third party.
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