Wraparound mortgages are a rare form of financing, primarily because the original mortgage lender must approve the secondary financing for it to be legitimate. (The average of the two rates is called the blended rate.) In return, the buyer obtains the necessary financing when a cheaper option is not available. The loan is formalized when the buyer and seller sign a promissory note.īecause it is a form of seller financing, which is generally more expensive than traditional real estate financing, the buyer usually pays a higher interest rate than the seller, which earns them a profit. The buyer makes monthly payments directly to the seller, who uses some to make regular monthly mortgage payments and keeps the rest. With a wraparound mortgage, however, the seller keeps the original loan and essentially âwrapsâ the buyer’s loan around it.
The seller, in turn, uses this money to pay off the existing mortgage. In a traditional home purchase, the buyer gets a mortgage and uses it to pay the seller for the house. Here’s what to consider before choosing this financing option. It can also be a profit for the seller.īut wrap mortgages come with serious risks that could make this form of seller financing worthless. This can allow buyers to make the purchase even if they cannot get approval for a traditional home loan or if the interest rate on a traditional mortgage would be too high. A wraparound mortgage is an unconventional type of loan that can help both buyers and sellers.
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