Wraparound Mortgage

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.

More Information Related to Finance Theory
Finance Concepts Debt Interest Rate
Public Finance Mortgage Loan Discount
Long Terms Financing Yield Curve Arbitrage
Finance Services Company Arbitrage Pricing Credit Derivative
Binomial Options Pricing Model Capital Asset Pricing Model Cox Ingersoll Ross Model
Black Model Black Scholes Model Chen Model
Liquidity Risk Commodity Risk Consumer Credit Risk
Systemic Risk Currency Risk Market Risk
Interest Rate Risk Settlement Risk Equity Risk
Gordon Model Monte Carlo Option Model Ho Lee Model
Rendleman Bartter Model Vasicek Model Hull White Model
Rational Choice Theory Modern Portfolio Theory Cumulative Prospect Theory
Efficient Market Hypothesis Arrow Debreu Model International Fisher Effect
Floating Currency Financial Risk Management Hyperbolic Discounting
Personal Budget Floating Exchange Rate Discount Rate

Last Updated on : 1st July 2013

This website is up for sale at $20,000.00. Please contact 9811053538 for further details.