Realty.com

What’s a Wrap Mortgage?

Posted May 11, 2010 by Matthew Denton

It may sound tempting for sellers - but it’s too risky.

Can two mortgages in one property exist? It’s absurd if you think about it but wrap-around mortgages (or “wrap” for short), are common in some areas where they allow such loans. Wrap-around mortgage is a loan that a lender takes responsibility for based on the current mortgage. For example, a seller who’s very much eager to sell the property and finds an interested buyer will use the monthly payments from the buyer to pay for his own mortgage. Thus, the mortgage of the buyer “wraps” the mortgage of the seller which is then paid to the lender.

Most of the time, the seller is also the lender. It’s another type of financing for sellers themselves. Let’s take a more detailed example.

If the seller has a $100,000 mortgage on his home and plans to sell it to the buyer for $150,000, the new mortgage wraps around the $100,000 mortgage since it will now constitute payments on the old mortgage. The lender can gain more from this transaction since he can take the difference between the interest rates of the two mortgages and generate higher returns.

But sellers must take caution when they’re planning to wrap their mortgages. This practice means that they can violate terms of the contract. They may not inform the lender about it to get away with penalties but it will surely get them into trouble later on. Buyers must also be aware if the seller is planning to use a wrap mortgage. Even if they make their payments monthly but the seller fails to pay his mortgage to the lender, the new buyer can’t still claim title to the property. Sooner or later, the home will be foreclosed since it wasn’t transferred legally.

Likewise, the risk of not paying the seller can spell trouble. If the buyer fails to fulfill his financial obligations, then the purpose of wrapping the mortgage is of no use. This proves that wrap mortgage deals often fail and it would be much worthwhile to find safer alternative means in financing your mortgage.

Realty.com is a real estate search portal, dedicated to connecting home buyers and sellers to trusting real estate services. Follow the Realty.com blog for up to date housing news and trends. And monitor local mortgage rates at RealtyGadget.com.