Definition
A wraparound mortgage is a secondary loan that encompasses an existing mortgage and adds additional financing to cover a new purchase price. It effectively “wraps” around the original mortgage, allowing the property seller to keep the existing mortgage intact while also enabling the buyer to finance the purchase.
Comparison: Wraparound Mortgage vs. Traditional Mortgage
| Feature |
Wraparound Mortgage |
Traditional Mortgage |
| Definition |
A secondary loan that includes an existing loan. |
A primary loan used to purchase property. |
| Involvement of Existing Loan |
Yes, it wraps around an existing mortgage. |
No, it pays off any existing loans. |
| Cumulative Loan Amount |
Combines the original mortgage and additional amount. |
Covers only the purchase price of the property. |
| Parties Involved |
Buyer, seller, and potentially the original lender. |
Buyer and lender only. |
| Payment Structure |
Cancels payments to original lender and keeps some profit. |
Payments are made solely to the lender. |
How a Wraparound Mortgage Works
In a wraparound mortgage, the buyer pays the seller monthly payments, which the seller then uses to pay the original mortgage. The seller thus collects a bit of “profit” on the difference between the wraparound amount and their original mortgage payment. It’s like making a sandwich – the bun (original mortgage) is included, but you’re tossing a delicious filling (additional loan) to create a complete bite!
flowchart TD
A[Buyer] --> B{Monthly Payment}
B -->|Sells to Seller| C[Seller]
C --> D{Original Mortgage Payment}
D -->|Paid to Lender| E[Lender]
B -->|Extra Profit| F[Seller’s Profit]
Examples
-
Situation: The seller has a current mortgage of $150,000. They are selling the property for $200,000.
- Wraparound mortgage amount: $200,000 (total selling price)
- Payments: Buyer sends mortgage payments to seller who uses a part of it to satisfy the $150,000 original loan.
-
Negotiation: Instead of fixing up the property and paying off the old mortgage, the seller gives a wrap mortgage to the buyer, who gets immediate possession of the property with manageable terms.
- Secondary Financing: Additional financing secured through a loan subordinate to the primary loan.
- Promissory Note: A legal document in which one party promises to pay a specific sum to another.
- Seller Financing: An arrangement in which the seller finances the purchase directly rather than through a traditional lender.
Humorous Insights & Fun Facts
-
“A wraparound mortgage is like wrapping a present: much more fun when you realize there are no debts hiding inside!”
-
Fun Fact: Wraparound mortgages were invented during the Roaring Twenties when real estate speculation was at an all-time high. Just like flapper dresses, they’ve never gone entirely out of style!
Frequently Asked Questions (FAQs)
-
What happens if the original mortgage is called due?
- The wraparound mortgage might collapse, potentially leaving the buyer in a tough spot like trying to find where you parked your rented electric scooter!
-
Are wraparound mortgages legal in all states?
- Though popular in many areas, not all states allow these mortgages. Always check state regulations—like checking the expiration date on that avocado toast!
-
Can a buyer with bad credit secure a wraparound mortgage?
- Yes! Since the seller is directly financing the loan, credit issues become less of a blocking factor. Talk about tasty deal-making!
Suggestions for Further Reading
-
Books:
- “Real Estate Investing for Dummies” by Eric Tyson & Robert S. Griswold
- “Rich Dad’s Guide to Investing” by Robert Kiyosaki
-
Online Resources:
Test Your Knowledge: Wraparound Mortgage Quiz
## What is a Wraparound Mortgage?
- [x] A mortgage that includes an existing mortgage with additional financing.
- [ ] A type of mortgage where the buyer takes over the seller's mortgage without any other financing.
- [ ] A mortgage that requires the buyer to make all payments upfront.
- [ ] A mortgage that allows banks to forget about land ownership rights.
> **Explanation:** A wraparound mortgage is indeed one that includes an existing loan and has additional financing bundled within it. Creative financing at its best!
## Which statement is true regarding wraparound mortgages?
- [ ] Buyers make payments only to the original lender.
- [ ] The seller prefers the wraparound as a means to avoid paying off their original mortgage.
- [ ] Wraparounds are rare in real estate transactions.
- [x] Recipients of wraparound loans often enjoy flexible terms.
> **Explanation:** Wraparound mortgages can provide buyers and sellers flexibility and various benefits in negotiations that traditional loans often don’t.
## Which additional financing type does a wraparound mortgage represent?
- [x] Secondary financing
- [ ] Primary financing
- [ ] Bad debt financing
- [ ] Investment property financing
> **Explanation:** Wraparound mortgages are classified as secondary financing since they coexist with another mortgage.
## Wraparound mortgages primarily benefit which party the most?
- [ ] The original lender
- [ ] The bank
- [x] The seller
- [ ] The title company
> **Explanation:** The seller gains benefits because they are often able to collect profits and retain the original mortgage.
## A seller issues a wraparound mortgage. What should they do?
- [ ] Forget about making original mortgage payments.
- [x] Use part of the payments received from the buyer to pay the original lender.
- [ ] Call the original lender for a refund.
- [ ] Buy a yacht immediately.
> **Explanation:** In a wraparound mortgage, the seller should use the payments from the buyer to manage the original mortgage loan, unless they hope to buy a yacht for their next life crisis.
## What happens if the buyer defaults on their wraparound mortgage payments?
- [ ] The seller buys them ice cream.
- [ ] The original loan becomes null and void.
- [x] The seller could face losing both the original and the wraparound mortgage in a worst-case scenario.
- [ ] The market drops out, and everyone
> **Explanation:** A default by the buyer can lead to serious implications, including losing the property and potentially owing more than what’s recoverable—so avoid defaults at all costs!
## Why might a buyer choose a wraparound mortgage?
- [ ] To make easy profit off a struggling homeowner.
- [x] To secure financing despite not being able to get a traditional mortgage easily.
- [ ] Because they enjoy complex legal arrangements.
- [ ] They think it’s a new bubble tea recipe.
> **Explanation:** Buyers often opt for wraparound mortgages to obtain financing when traditional loans might not be available.
## In a wraparound mortgage, who makes the payments?
- [ ] The lender makes all the payments to themselves.
- [x] The borrower makes payments to the seller who then pays the lender.
- [ ] The government pays the seller.
- [ ] The title company takes care of it.
> **Explanation:** The buyer directly pays the seller, who is then responsible for maintaining the payments to the original lender.
## Which is NOT a benefit of wraparound mortgages?
- [ ] Flexibility in terms for buying property.
- [ ] Quicker transactions compared to traditional loans.
- [x] Guaranteed approval for any credit-level buyer.
- [ ] Opportunity for the seller to earn extra income from payments.
> **Explanation:** While wraparound mortgages have many benefits, guaranteed approval for any buyer is a pipe dream! Each situation is unique.
