Wraparound Mortgage

A Wraparound Mortgage is a form of secondary financing for the purchase of real estate. It is a unique type of loan where the new mortgage is wrapped around the existing loan. This means the new lender essentially takes over the payments of the original mortgage, while providing additional financing to the borrower, usually at a higher interest rate.

Understanding Wraparound Mortgage

Imagine a current homeowner who still owes $100,000 on their original mortgage with an interest rate of 4%. If they want to sell their home priced at $200,000, they could opt for a wraparound mortgage. Here, the seller extends a mortgage of $200,000 to the buyer at a higher interest rate, say 6%. The buyer pays the seller for both the original loan amount and the additional financed amount, and the seller continues to pay the original $100,000 mortgage. Essentially, the new wraparound mortgage consolidates the two debts.

Formula for Wraparound Mortgage

There is no specific mathematical formula for a wraparound mortgage, as it involves negotiating terms between the buyer and the seller, focused mainly on the balance and rate. However, it is critical to understand the principal balances, interest rates, and monthly payments involved:

• Principal Balance of Original Mortgage
• Interest Rate of Original Mortgage
• Principal Balance of Wraparound Mortgage
• Interest Rate of Wraparound Mortgage
• Monthly Payment Calculation

Example of Wraparound Mortgage

Consider a property valued at $300,000. The seller still owes $150,000 on their original mortgage with an interest rate of 5%. A buyer is interested but struggles to secure traditional financing. Here, the seller could offer a wraparound mortgage, financing the entire $300,000 at a rate of 7%. The buyer makes monthly payments based on this higher amount and rate, from which the seller pays the original mortgage and pockets the difference.

Importance of Wraparound Mortgage

Wraparound mortgages can be beneficial for both buyers and sellers. Buyers who may not qualify for traditional lending options find it an accessible path to homeownership. For sellers, it provides an opportunity to sell their property faster and potentially earn on the interest rate difference. It is, however, crucial for both parties to undergo thorough financial and legal advising to ensure the arrangement is beneficial and legally sound.