Wrap-Around Loan

Definition

A wraparound mortgage is a type of mortgage often used in owner financing transactions. It involves the seller's existing mortgage on the property, with an additional incremental value added to determine the total purchase price that the buyer must pay to the seller over time.

Origin

The wraparound mortgage originated in the mid-20th century in the U.S. real estate market as a flexible financing tool to help buyers and sellers complete transactions when traditional loans were hard to obtain. As the real estate market evolved, this form of loan became widely used.

Categories and Features

Wraparound mortgages are mainly divided into two types: fixed-rate and adjustable-rate. Fixed-rate wraparound mortgages offer stable monthly payments, while adjustable-rate loans may change with market interest rates. Key features include the seller acting as the lender, and the total amount paid by the buyer includes the existing mortgage and the additional increment. The advantages of this loan are its flexibility and potentially lower down payment, but the disadvantages include possibly higher interest rates and legal and financial risks.

Case Studies

Case 1: After the 2008 financial crisis, many homeowners struggled to obtain traditional loans. A homeowner sold their property using a wraparound mortgage, allowing the buyer to gain ownership with a lower down payment and pay the remaining amount in installments. Case 2: In California, a seller successfully sold a high-value property through a wraparound mortgage, enabling the buyer to complete the transaction without securing a bank loan.

Common Issues

Common issues investors face with wraparound mortgages include ensuring the seller pays the existing mortgage on time and managing the risks of interest rate fluctuations. It is usually advised to consult legal and financial advisors before signing contracts to avoid potential legal disputes and financial losses.