What is a wrap around mortgage?

Definition of Wrap-Around Mortgage

A wrap-around mortgage is a type of loan that allows a buyer to purchase a real property even if they are already paying off an existing mortgage loan. A wrap-around loan, also known as a “wrap” or an “all-inclusive mortgage” allows a buyer to increase their total financing through either a second lender or from the home seller. The new lender, then, assumes the payment of the buyer’s existing mortgage on condition that they provide the buyer with a new, larger mortgage loan. The benefit to the buyer is they obtain a larger mortgage loan. The benefit to the bank or seller is they can charge a higher interest rate for the new wrap around mortgage.

Why is this term important?

A wrap around loan is typically used as a way to refinance a buyer's current property or to finance the purchase of a new property when an existing mortgage can not be dissolved or paid off.

The amount of a wrap around mortgage will include the outstanding balance of the initial mortgage, plus any additional funds required for the new home purchase or the refinance. The buyer (or borrower) will then make payments to the seller or new bank lender based on the larger loan, while the new lender will make the payments required to pay off the original mortgage loan.

Examples of term

Wraps, or wrap around mortgages, are a form of seller financing and, as a result, often help reduce the barriers to real property ownership or to the sale of a home. This method of financing is particularly useful when mortgage qualification rules make it harder for buyers to obtain financing and a seller is motivated to sell.

Quite often a wrap around mortgage will be designed as a vendor take-back mortgage, where the seller, who has the original mortgage, sells the home with the existing first mortgage in place and a second mortgage, which the seller, known as the vendor, "takes back" from the buyer. This new wrap around mortgage would include the first mortgage, any additional purchase price sum, minus any down payment or closing costs previously agreed to between the buyer and seller. Once the deal closes, the buyer would make the monthly mortgage payments to the seller, who proceeds to pay the mortgage debt off at the bank or mortgage lender.