A wraparound mortgage is a type of two-part mortgage used with assumable mortgage loans. The existing mortgage is retained as the first mortgage and a new, larger mortgage is obtained as a second mortgage. The new mortgage pays the old mortgage monthly payments and the buyer pays only the second mortgage monthly payments.
For example, Patti is selling her home and has an outstanding assumable mortgage with a balance of $50,000. Lynn buys the house and needs a $150,000 mortgage loan to make the purchase. Instead of paying off the first mortgage with a new mortgage, the new mortgage loan is obtained and the old mortgage loan is retained. Future mortgage payments on the first mortgage are made by the lender of the second mortgage, and Lynn need only make monthly mortgage payments on the second mortgage.
Why would a lender prefer a wraparound mortgage? Let’s look at the example. In a traditional process, the lender would have to come up with $150,000 cash in hand to be able to finance the mortgage-in the wraparound scenario the lender would only have to come up with $100,000 to finance the mortgage. Also, assume the first mortgage was bearing 7.5% interest and the second mortgage was bearing 8.5% interest-the $50,000 difference is therefore also generating a 1% interest rate difference in favor of the lender of the second mortgage. In nearly all cases, the home seller (in our example, Patti) is herself the second mortgage lender.