Wraparound Mortgage
A junior mortgage that includes and 'wraps around' an existing first mortgage on the property.
Definition
A wraparound mortgage (or 'wrap') is a form of seller financing where the seller extends credit to the buyer for the full purchase price — but the seller's existing mortgage remains in place. The new loan 'wraps around' the old one. The buyer makes one monthly payment to the seller, who then makes the underlying mortgage payment to the original lender.
Example: Seller has a $150,000 mortgage at 4%. Buyer purchases for $250,000 with a wraparound mortgage at 6%. Buyer pays the seller based on $250,000 at 6%; seller pays the original lender $150,000 at 4% and pockets the spread on both the equity and the interest rate differential.
The seller earns income on both the interest rate spread and the equity component. However, wraparound mortgages carry the same due-on-sale risk as subject-to deals — if the original lender discovers the property has been transferred, they can call the underlying loan. These are powerful creative finance tools that require careful legal structuring.
Related Terms
Seller Financing
A transaction where the seller extends credit to the buyer, eliminating the need for a traditional bank loan.
Subject-To
Buying a property 'subject to' the existing mortgage — the deed transfers but the loan stays in the seller's name.
Owner Financing
A transaction where the seller acts as the lender — providing financing directly to the buyer.
Note (Promissory Note)
A written promise to repay a loan — the legal document that evidences the debt in real estate financing.
Balloon Payment
A large lump-sum payment due at the end of a loan term that pays off the remaining balance.