A wraparound mortgage is a junior encumbrance that is ordinarily made when property will support additional financing, and the mortgagor does not want to prepay a favorable existing mortgage obligation but needs additional cash, or where the existing obligation precludes prepayment or contains an excessive prepayment penalty. In such an instrument, the wraparound beneficiary charges interest on the entire amount of the wraparound loan and agrees to make the principal and interest payments on the existing prior encumbrance as it collects principal and interest payments from the mortgagor.
Maryland Wraparound Mortgage
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US-01438BG
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A wraparound mortgage (also called a mortgage wrap) is a special form of seller financing. It provides property sellers and buyers with an alternative to the traditional property sale.
Example of a wrap-around loan She decides to finance a loan for John to purchase her home. Tia and John agree to a $40,000.00 down payment and a $160,000 wrap-around loan in favor of Tia at a 5% fixed interest rate. John pays Tia monthly on his loan and Tia then uses that money to make the payment on her existing loan.
Wraparound Mortgage Example Both Michaela and Alex agree to a $10,000 down payment and $150,000 wraparound mortgage from the seller at a 6% fixed interest rate. Alex pays Michaela monthly for the second mortgage, which Michaela uses to pay off her original mortgage and keeps the difference between the two payments.
After a wrap transaction, there are two separate and independent sets of payment obligations. The buyer becomes obligated to the seller on the new wrapped note, which is secured by a mortgage wrap deed of trust; and the seller remains obligated on the first-lien/wrapped note until it is paid and released.
Wraparound mortgages are not common, and this is mostly because the original lender has to sign off on this secondary form of financing. If the lender requires that the original loan is paid off before the seller is eligible to sell the home, then a secondary or junior mortgage may not be feasible.
The chief danger of the wrap around mortgage is to the seller. Most mortgages have a "due on sale" clause. This means if the house is sold, the entire mortgage balance is due. If the seller cannot pay that amount or borrow it and pay it, the lender could foreclose on the home.
A wraparound mortgage is a unique form of seller financing in which the seller keeps their mortgage and extends a loan to the buyer. The buyer pays the seller each month and the seller uses that money to pay their own mortgage. For this to be a (legal) option, the seller must have an assumable mortgage.
