Wraparound Mortgage
A financing arrangement where a new loan wraps around an existing mortgage, with the seller continuing to pay the original lender.
What is Wraparound Mortgage?
A wraparound mortgage is a form of seller financing in which the seller extends credit to the buyer for the total purchase price minus the down payment, creating a new loan that 'wraps around' the existing mortgage still in place on the property. The buyer makes payments to the seller, and the seller uses a portion of those proceeds to continue making payments on the original (underlying) mortgage to the first lender. The interest rate on the wraparound loan is typically higher than the underlying mortgage, allowing the seller to earn an interest-rate spread. Wraparound mortgages are most common in creative real estate transactions where conventional financing is unavailable or the seller's existing mortgage has a below-market rate worth preserving. They carry significant legal risk: most first mortgages contain due-on-sale clauses requiring the full balance to be paid upon transfer, potentially triggering acceleration if the lender discovers the arrangement.
Example
A seller has an existing $150,000 mortgage at 4.5% on a home valued at $300,000. A buyer offers to purchase using a wraparound: the seller provides a $260,000 wraparound mortgage at 7%, the buyer pays $40,000 down, and the seller continues paying the underlying $150,000 mortgage. The seller earns a 2.5% spread on the $150,000 overlap while the buyer avoids conventional qualification requirements.