What is a Wraparound Mortgage?
A wraparound mortgage (wrap loan) is a seller-financing technique where the seller keeps their existing mortgage in place and creates a new, larger mortgage for the buyer that "wraps around" the original. The buyer makes one payment to the seller at a higher interest rate, and the seller continues making payments on the original lower-rate mortgage. The seller profits from the interest rate spread between the two loans.
How the Interest Rate Spread Works
Example: A seller has a $120,000 mortgage at 3.75%. They sell the property for $195,000 with $15,000 down, creating a $180,000 wrap loan at 6.5%. The buyer pays the seller based on $180,000 at 6.5%. The seller pays the bank based on $120,000 at 3.75%. The seller keeps the difference — both the rate spread and the principal spread. This can generate hundreds of dollars per month in passive income.
Legal Considerations
Wraparound mortgages carry similar risks to subject-to deals — the original lender's due-on-sale clause could be triggered. Additionally, the buyer must trust that the seller continues making payments on the underlying mortgage. Use a third-party loan servicing company and consult a real estate attorney to structure the agreement properly. Wraparound mortgages are more common in investor-friendly states like Texas and Arizona.