Definition of wraparound mortgage

financing arrangement in which an existing mortgage is refinanced, and additional money loaned at an interest rate between the rate charged on the old loan and current market rates. The lender, who agrees to pass through part of the loan payments to the original mortgage lender, combines or wraps the remainderof the old loan with the new loan, and the borrower makes one monthlypayment. Wraparound loans generally earn a higher yield for the lender than new mortgage loans because the wraparound lender advances only the difference between the unpaid first mortgage and the combined principalof the two loans, but the wraparound rate is computed on the borrower'stotal debt. A wraparound mortgage is an alternative torefinancing the entire loan when a borrower needs additional funds.

a loan arrangement in which an existing loan is retained and an additional loan, larger than the existing one, is made. The new lender accepts the obligation to make payments on the old loan. The existing loan generally carries an interest rate below the rate available on new loans. Consequently, the yield to the wraparound lender is higher than the rate charged on the new loan. Sellers are the most common wraparound lenders. In an installment sale with a wraparound mortgage, the seller does not reduce the contract price by the amount of the underlying wrapped mortgage.

second mortgage that increases a borrower's indebtedness while leaving the original mortgage contract in force. The wraparound mortgage becomes the junior mortgage and is held by the lending institution as security for the total mortgage debt. The borrower makes payments on both loans to the wraparound lender, who in turn makes scheduled installment payments on the original senior mortgage. It is a convenient way for a property owner to obtain additional credit without having first to pay off an existing mortgage.

A mortgage that includes in its balance an underlying mortgage. Rather than having distinct and separate first and second mortgages, a wraparound mortgage includes both. For example, suppose that there is an existing first mortgage of $100,000 at 6% interest. A second mortgage can be arranged for $50,000 at 10% interest. Instead of getting that second mortgage, the borrower arranges a wraparound for $150,000 at 8%. The first mortgage of $100,000 stays intact. The borrower pays the wraparound lender one payment on the $150,000 wraparound, and the wraparound lender remits the payment on the first mortgage to the first mortgage lender.