What is a Wraparound Mortgage?

A wraparound mortgage is a mortgage that "wraps around" an existing mortgage. The lender is responsible for the first mortgage, and the borrower is responsible for the other. For example: Sally has a home with a mortgage of $60,000 that she sells to Bob for $95,000. Bob puts $5,000 down on the home and gets a mortgage for $90,000. The lending bank wraps Bob's $90,000 loan around the $60,000 Sally still owed on the home. Bob's lender will make the payments on the old mortgage from Sally. 

Lenders go with this mortgage type because it makes them money. They can get a lower interest rate on the loan they are responsible for and charge higher interest on the loan to Bob. For example, if Sally's loan of $60,000 is at 6%, and Bob's loan is at 8%, the bank earns the difference between those two interest rates as it pays off the balance on Sally's loan. 

If your mortgage is not assumable, it may not be able to be wrapped. The wrap around mortgage is a form of seller financing. If Bob decides to default on his mortgage, then Sally has no choice but to foreclose and sell the property to pay the balance on her mortgage. 

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