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A wrap-around mortgage is a type of loan that is commonly used in seller financing. Here are the basics of the wrap-around mortgage and how it works.
Wrap-Around Mortgage
The wrap-around mortgage is a type of second mortgage that essentially wraps around the first mortgage. An individual will borrow money for a second mortgage and use that money to make payments on the first mortgage. With this type of mortgage, the first mortgage is not actually going to be paid off as would be common with a normal selling arrangement.
Advantages
This situation can be advantageous for the lender in the transaction. If the first mortgage has a low interest rate, the lender can then make payments on the mortgage while loaning the money at a higher interest rate to the buyer of the property.
Risks
Even though you can make more money lending money this way through owner financing, it is also very risky. If you choose the wrong individual to work with, you could find yourself losing money on the transaction. For example, if you set up this type of transaction and then your buyer does not continue making the payments for you, you are going to be out some money.
