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§
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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.
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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.
Related 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§
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“A wraparound mortgage is like wrapping a present: much more fun when you realize there are no debts hiding inside!”
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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)§
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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!
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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!
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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§
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Books:
- “Real Estate Investing for Dummies” by Eric Tyson & Robert S. Griswold
- “Rich Dad’s Guide to Investing” by Robert Kiyosaki
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Online Resources:
