Wraparound Mortgage: What It Is & How It Works

Wraparound mortgages have been around for less than 50 years, dating to a late 1970s spike in interest rates.¹ Sellers were driven to get creative when inflation hit and rates rose past what buyers could afford. Sound familiar?

Wraparound mortgages are a rare type of seller financing that comes with both valuable pros and serious cons. There are circumstances where a traditional mortgage loan may not be ideal. If you’re finding it challenging to sell your home, and don’t mind some risk and profit opportunity with your financial dealings, a wraparound mortgage may be for you. 

Definition of a Wraparound Mortgage

Exactly what is a wraparound mortgage? It’s a type of assumable mortgage that wraps seller financing around an ongoing mortgage. It combines: 

1. The seller’s original loan, which continues as is
2. A new mortgage directly between the seller (lender) and buyer (borrower)

Instead of paying off a mortgage after selling to a buyer with their own lender shelling out the money, the seller keeps their existing loan and repays it using payments they receive from the buyer. 

How Does a Wraparound Mortgage Work?

Consider this wraparound mortgage example: 

Let’s say John sells his home to Anne. John’s property is valued at $250,000, and he has $100,000 left to pay on an assumable mortgage with a 4.5% interest rate. 

Anne signs a promissory note to John to pay him $230,000 over 25 years at 5.75% interest and starts with a 5% down payment of $11,500. Each month, she pays $1,447.² 

John continues to pay down his mortgage—he has 15 years left on a 30-year loan for $150,000 (the original purchase price of the property) and his monthly payments are $760.² 

Even though John sells to Anne below market value, he benefits by: 

• Pocketing the $11,500 down payment
• Profiting from the 1.25% difference in interest rates
• Receiving income of $687 each month after his $760 mortgage payment is made

As for Anne, she’s able to: 

• Purchase a home for $20,000 under market value
• Save $49,112 on total interest paid by negotiating a loan term of 25 years instead of 30²
• Afford monthly payments at 5.75% interest vs. the average rate of 6.88% in April 2024³
• Avoid paying private mortgage insurance (PMI) with only a 5% downpayment 

To help John and Anne reduce some of the risks on both sides and particularly to avoid the potential for primary mortgage default: 

• They each consult a real estate lawyer to help negotiate, draft, and review documents
• John has Anne set up an escrow account to cover any tardy or missing future payments
• Anne splits her monthly payments to send $760 to John’s mortgage lender and $687 to John

Benefits for Buyers and Sellers

While there are pros and cons specific to each role, wraparound mortgages have some benefits that apply to both buyers and sellers. 

Tailored Solutions

Seller-based financing doesn’t come with cookie-cutter options like conventional mortgages and lender guidelines—how about a 23-year mortgage instead of 15 or 30 years? Or quarterly instead of monthly mortgage payments? 

There’s room for creative financing options since these arrangements take place directly between a seller and a buyer, without conventional mortgage lenders between them. 

Relief from Interest Rate Barriers

Low interest rates mean that more buyers can afford to become homeowners, while high rates lead to fewer offers and more time on the market for sellers. Wraparound mortgages can break through these barriers on both sides, providing more potential buyers for the seller and affordable opportunities for buyers. 

When interest rates are low, this type of seller financing is especially uncommon. But rates have risen sharply since the record low average of 2.65% in early 2021 for a 30-year fixed-rate mortgage to 7.03% in May 2024 (after a late 2023 7.79% spike).³ 

Profit

Sellers can profit by offering an interest rate higher than their original mortgage, potentially even higher than current market rates. 

Buyers can profit with a better rate than they could otherwise lock in—whether that means lower than current market rates or lower than they could achieve based on qualifying factors such as a poor credit history.

Financial Implications

A wraparound mortgage is in junior or second place in terms of property liens. This means that if payments aren’t made—regardless of whose fault it is—the original mortgage lender has the ability to recoup their losses before any other party receives sale proceeds. 

For homeowners considering selling a home, understanding the financial implications, including lien priorities like those involved in wraparound mortgages, is crucial.

Is a Wraparound Mortgage Right for You? 

Are you one of the exceptions to the “they’re not for everyone” statement when it comes to wraparound mortgages? Consider your skills, habits, and risk tolerance, plus: 

• Mortgage qualification – In order to set up a wraparound, the seller’s mortgage must be assumable. While FHA, VA, and USDA mortgages are assumable, most traditional mortgage loans are not.⁴

• Time and effort – Standard lending and closing costs cover the bases of legalities, safeguards, and expectations. Both parties in a wraparound mortgage will have more work to do protecting their interests. Sellers are responsible for ongoing statements, reminders, recordkeeping, and accounting for taxes.

• Cash flow cushion – Because both parties’ actions are critical, trust may not be enough. If a monthly payment is late or missed, having an escrow account or cash set aside to cover the other’s delinquency may be necessary to safeguard your own interests.

• Location – Wraparound mortgages are generally legal in most locations. However, state guidelines can impact the process or language, and a few states—Texas and Louisiana—have regulations specific to wraparound mortgages.⁵

Find a Better Alternative with Truehold

While it allows for rewards, wraparound mortgages involve high risks on both sides. Do you wonder about other ways to handle your mortgage, like “Can you sell your house and keep the mortgage”? Truehold is the resource you need. If you’re a homeowner worried about interest rates and looking for an alternative to a conventional sale, there’s another financing option to consider: Truehold's sell and stay transaction. 

If you’re looking to avoid rising interest rates and stress of a traditional sale, we’re here to help. Truehold's sell and stay transaction allows you to unlock your home equity, debt-free, and continue living in your home as a renter.

Call (314) 353-9757 today to get started.

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Sources: 

1. Wall Street Mojo. Wraparound Mortgage. https://www.wallstreetmojo.com/wraparound-mortgage/
2. Bankrate. Loan Repayment Calculator. https://www.bankrate.com/loans/loan-repayment-calculator/‍
3. FRED.  30-Year Fixed Rate Mortgage Average in the United States. https://fred.stlouisfed.org/series/MORTGAGE30US‍
4. Bankrate. What is a wraparound mortgage and how can it help buyers and sellers? https://www.bankrate.com/mortgages/what-is-a-wraparound-mortgage/‍
5. LegalMatch. What Is a Wrap-Around Mortgage? https://www.legalmatch.com/law-library/article/what-is-a-wrap-around-mortgage.html

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