What Is a Wrap Around Mortgage and How Does It Work?

A wrap around mortgage is a form of seller financing where a new loan encompasses an existing one, allowing a property sale to proceed without immediately satisfying the original mortgage. This arrangement provides a buyer with financing directly from the seller. It differs from traditional mortgages where a third-party lender provides funds, as the seller steps into the role of the lender.

Understanding the Wrap Around Mortgage Concept

A wrap around mortgage is a junior loan that includes the unpaid balance of an existing, senior loan. The new mortgage created by the seller “wraps around” the original, making it a larger, consolidated debt. The original mortgage remains in place and is not paid off or assumed by the new buyer during the transaction.

Three main parties are involved: The original seller (also the original borrower) maintains their existing mortgage obligation to their lender. The original buyer becomes the new seller, creating the wrap around mortgage and acting as the lender to the new buyer. The new buyer is the borrower on this wrap around mortgage, making payments directly to the new seller.

The new loan issued by the seller is typically for the full purchase price, including the remaining balance of the seller’s original mortgage. The new buyer does not directly interact with the original lender; their contractual relationship is solely with the new seller.

How Wrap Around Mortgages Operate

The new buyer makes a single, consolidated monthly payment to the new seller. A portion of this payment is then used by the new seller to fulfill their ongoing obligation to the original lender on the underlying mortgage. The new seller is responsible for ensuring the original mortgage payments are made consistently and on time.

The interest rate on a wrap around mortgage is typically structured to benefit the new seller. This rate is usually higher than the interest rate on the underlying mortgage, allowing the new seller to generate profit from the difference between the rate they pay and the higher rate they charge the new buyer. For example, if the original mortgage has a 4% interest rate, the wrap around mortgage might be set at 6% or 7%.

Legal documentation is crucial in establishing a wrap around mortgage. This typically includes a new promissory note, which is a legal promise from the new buyer to repay the loan to the new seller. A new deed of trust or mortgage document also secures the wrap around loan against the property. These documents outline the terms of the loan, including the payment schedule, interest rate, and any conditions of default.

Structural Components of a Wrap Around Mortgage

The original mortgage remains active and in the name of the original buyer, who is now functioning as the new seller. The new buyer does not directly assume or become responsible for the underlying mortgage payments to the original lender; their payment obligation is exclusively to the new seller, who then manages the original loan.

Many existing mortgage contracts include a “due-on-sale” clause, which is a provision allowing the original lender to demand immediate repayment of the entire loan balance if the property is sold or transferred. This clause is a significant structural consideration because the property’s ownership interest is conveyed to the new buyer while the underlying loan remains in place. Its enforcement can vary, and some lenders may not always exercise it immediately upon transfer of ownership.

Regarding property title, the handling can vary. It is common for the new seller to retain legal title to the property until the wrap around mortgage is fully paid by the new buyer. Alternatively, the deed might be held in escrow by a neutral third party until the loan is satisfied, providing security for both parties. This arrangement ensures the new buyer gains equitable interest and possession while the new seller’s interest as the lender is protected.