how a wraparound mortgage works
frequently a wraparound mortgage is a method of refinancing a property or financing the purchase of another 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 lender the borrower makes the larger payments on the new wraparound loan which the lender will use to pay the original note plus provide themselves a profit margin 1 depending on the wording in the loan documents the title may immediately transfer to the new owner or it may remain with the seller until the satisfaction of the loan a wraparound mortgage is a form of seller financing that does not involve a conventional bank mortgage with the seller taking the place of the bank 2since the wraparound is a junior mortgage any superior or senior claims will have priority in the event of default the original mortgage would receive all proceeds from the liquidation of the property until it is all paid off wraparound mortgages are a form of seller financing where instead of applying for a conventional bank mortgage a buyer will sign a mortgage with the seller the seller then takes the place of the bank and accepts payments from the new owner of the property 2 most seller financed loans will include a spread on the interest rate charged giving the seller additional profit 1wraparound mortgage vs second mortgageboth wraparound mortgages and second mortgages are forms of seller financing a second mortgage is a type of subordinate mortgage made while an original mortgage is still in effect the interest rate charged for the second mortgage tends to be higher and the amount borrowed will be lower than that of the first mortgage 3a notable difference between wraparound and second mortgages is in what happens to the balance due from the original loan a wraparound mortgage includes the original note rolled into the new mortgage payment 1 with a second mortgage the original mortgage balance and the new price combine to form a new mortgage 3example of a wraparound mortgagefor example mr smith owns a house that has a mortgage balance of 50 000 at 4 interest mr smith sells the home for 80 000 to mrs jones who obtains a mortgage from either mr smith or another lender at 6 interest mrs jones makes payments to mr smith who uses those payments to pay his original 4 mortgage mr smith makes a profit on both the difference between the purchase price and the original owed mortgage and on the spread between the two interest rates depending on the loan paperwork the home s ownership may transfer to mrs jones however if she defaults on the mortgage the lender or a senior claimant may foreclose and reclaim the property 