Wraparound mortgage is a loan arrangement where a new loan is granted for the property while retaining the existing loan. The payments of both the mortgages are given to the wraparound mortgagee. The wraparound mortgagee then forwards the payment of the initial mortgage to the first mortgagee.
In other way, it can also be said that wraparound mortgage is a mortgage that protects a debt that includes the due balance of an existing mortgage and an additional loan amount assigned by the wraparound mortgagee.
The wraparound mortgage is intelligently used to lure a third party into loan making. The wraparound mortgage can also raise the interest amount considerably for both the third party lender and the property seller.
The following example helps to explain the concept of wraparound mortgage. Let us assume that A has a mortgage of $70,000 on his home and sells it to B for $100,000. Now B makes a down payment of $10,000 and borrows the rest of $90,000 on the new mortgage. This new mortgage ‘wraps around’ the already existing mortgage amount of $70,000 because the lender will now be liable to pay the old mortgage payments.
A wrap-around mortgage is a good option for the lenders as they can purchase higher payoff for themselves from an existing mortgage with lower rate of interest. A wraparound mortgage is one type of seller-financing mortgage. The difference between the second mortgage and wraparound mortgage is that the old mortgage is repaid in case of the second mortgage financing while in case of the wrap-around mortgage it is not repaid.
Usually only the assumable mortgages are considered for wraparound mortgage. The assumable mortgages refer to those loans on which the existing borrowers are able to transfer their obligations to the house purchasers who are qualified to do so.
Wraparound mortgage can be used to beat the limitations on assuming old loans. It is also believed that when the home seller goes for wraparound mortgage, he actually breaks the contract with the lender. There are some states that do not allow wraparound mortgage. The sellers going for the wraparound mortgage need to check with the local authority before going for it.
Last Updated on : 1st July 2013