What is a wraparound mortgage?

A wraparound mortgage is a financing arrangement where a seller continues to hold their original mortgage and offers a new mortgage to the buyer that "wraps around" the existing one. This means that the buyer makes payments on the new loan, which includes the amount owed on the original loan plus any additional financing the seller has provided. The seller then uses those payments to pay off the existing mortgage while also potentially securing a profit from the interest on the new loan.

This financing option can be particularly beneficial in situations where the original mortgage has a lower interest rate than current market rates, allowing the seller to leverage that advantage to benefit from ongoing payments. It’s also an attractive option for buyers who might struggle to secure conventional financing or are looking for more flexible terms.

In contrast, the other options do not accurately capture the essence of a wraparound mortgage. While the first choice incorrectly suggests that a wraparound mortgage is simply a vehicle for paying off an existing loan, it does not reflect the ongoing obligation of the seller. Similarly, suggesting that a wraparound mortgage is exclusively for properties with no existing debts or that it applies only to commercial properties misses the nuances of how these loans function in residential real estate contexts.