What is Wraparound Mortgage?
289 reads · Last updated: December 5, 2024
A wraparound mortgage is a type of junior loan which wraps or includes, the current note due on the property. The wraparound loan will consist of the balance of the original loan plus an amount to cover the new purchase price for the property. These mortgages are a form of secondary financing. The seller of the property receives a secured promissory note, which is a legal IOU detailing the amount due. A wraparound mortgage is also known as a wrap loan, overriding mortgage, agreement for sale, or all-inclusive mortgage.
Definition
A wraparound mortgage is a type of secondary loan that includes or inherits the current outstanding loan on a property. The amount of the wraparound loan will include the original loan balance and the price of the newly acquired property. These mortgages are a form of secondary financing. The seller of the property receives a promissory note detailing the amount owed. Wraparound mortgages are also known as wrap loans, overriding mortgages, sales agreements, or all-inclusive mortgages.
Origin
Wraparound mortgages originated in the mid-20th century in the U.S. real estate market as a flexible financing tool to help buyers acquire properties in high-interest rate environments. They became particularly popular during the real estate boom of the 1980s, as they allowed buyers to purchase properties without paying high interest rates.
Categories and Features
Wraparound mortgages are primarily divided into two types: fixed-rate and adjustable-rate. Fixed-rate wrap loans offer stable monthly payments, while adjustable-rate loans may change with market interest rates. Key features include: 1. Seller financing: The seller provides the loan, and the buyer pays the seller instead of a bank. 2. Inclusion of existing loans: The new loan amount includes the balance of existing loans. 3. Flexibility: Suitable for buyers with lower credit scores.
Case Studies
Case Study 1: In the 1980s, a buyer in the U.S. purchased a property using a wraparound mortgage. Due to the high-interest environment at the time, the buyer opted for the seller-provided wrap loan to avoid high bank rates. Case Study 2: In the early 2000s, a seller in California used a wraparound mortgage to sell a property, attracting more buyers as they did not have to immediately pay off the existing loan.
Common Issues
Common issues include: 1. What are the risks of a wraparound mortgage? The main risk is that the seller may fail to continue paying the original loan, putting the buyer at risk of losing the property. 2. How to ensure the legality of a wrap loan? It is advisable to have a lawyer review the contract to ensure all terms are clear and explicit.
