When we talk about mortgage loans, there are a lot of terms that you will come across. Many of these terms are unfamiliar and can be hard to understand at first. 

That is especially true if we are new to getting a mortgage. And one of these terms that we will find when dealing with mortgage loans is known as a wraparound mortgage. 

Although you may not encounter this term, it is still a good one to know about. So below we’ll take a look at what is a wraparound mortgage and you’ll also get an overview of how one works.

What Is A Wraparound Mortgage?

A wraparound mortgage loan is a second home loan that wraps the current note due on the property. Hence, the name “wraparound mortgage.” 

If you are the seller and you have not yet fully paid your mortgage loan and plan to sell it, you can sell it to a buyer who is less qualified for a traditional mortgage loan. Once the buyer buys your property, they will carry your previous burdens and pay off the mortgage loans instead. 

The seller will keep the mortgage loan and offer seller financing to your buyer. Then they will wrap their buyer’s loan into the existing mortgage loan. 

How Does A Wraparound Mortgage Work?

During a wraparound mortgage loan deal, the seller and the buyer will agree to a down payment and a loan amount. A promissory note that contains the terms and agreement of the mortgage loan will be signed. 

Once both parties agree, the title, as well as the deed, will be named after the buyer. But the seller will continue to repay the original mortgage lender. 

As stated earlier, the seller will repay the mortgage using the buyer’s money. Obviously, the buyer’s payments should be higher than what the seller repays to the mortgage lender. 

The reason for that is that the buyer’s interest rate will be higher. This allows the seller to profit from the wraparound mortgage. 

Basically, it is a win-win situation for you and the buyer. That is especially true if the buyer is less qualified for a traditional mortgage loan. 

To give you an example, let’s say Mr. Smith sells his property that has a balance of $100,000 with a 3 percent interest to Mr. Connor. Mr. Smith is trying to sell the house at the price of $150,000 with a 7 percent interest to Mr. Connor. 

He knows that Mr. Connor can barely qualify for a traditional mortgage loan due to a bad credit score. So buying Mr. Smith’s property is probably the best course of action for Mr. Connor. 

Once Mr. Connor buys Mr. Smith’s property, he will pay Mr. Smith. And Mr. Smith will repay the original lender and profit from the additional interest that he input. 

That’s basically it. We hope that this article has helped shed some light on what a wraparound mortgage is. When you encounter this term in the future, you have a basic understanding of what it is and what you can do with it.

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