how a wrap around loan works
wrap around loans build on the owner financing concept and deploy the same basic structuring a wrap around loan structure is used in an owner financed deal when a seller has a remaining balance to pay on the property s first mortgage loan a wrap around loan takes into account the remaining balance on the seller s existing mortgage at its contracted mortgage rate and adds an incremental balance to arrive at the total purchase price in a wrap around loan the seller s base rate of interest is based on the terms of the existing mortgage loan to break even the seller must at least earn interest that matches the rate on the loan which still must be repaid thus a seller has the flexibility to negotiate the buyer s interest rate based on their current terms generally the seller will want to negotiate the highest possible interest rate in order to make payments on the first mortgage and also earn a spread on the deal example of a wrap around loanlet s say that joyce has an 80 000 mortgage outstanding on her home with a fixed interest rate of 4 she agrees to sell her home to brian for 120 000 who puts 10 down and borrows the remainder or 108 000 at a rate of 7 joyce earns 7 on 28 000 the difference between 108 000 and the 80 000 she still owes plus the difference between 7 and 4 i e 3 on the balance of 80 000 mortgage 