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Wraparound Mortgages 101: The Basics

Wraparound Mortgages 101: The Basics

If you’ve been around real estate investing or are exploring creative ways to buy or sell a home, you might have heard about wraparound mortgages (or “wraps”). This strategy is especially popular in situations where traditional financing isn’t an option for buyers or when sellers want to maximize profits. Here’s a simple guide to how wraps work, their benefits, and what you need to watch out for.

What is a Wraparound Mortgage?

A wraparound mortgage is a form of seller financing. The seller keeps their original mortgage in place and “wraps” a new mortgage around it, selling the home to a buyer who makes payments directly to the seller. The seller uses a portion of these payments to pay their original lender and keeps the difference as profit.

Example:

  • The seller owes $100,000 on a mortgage at 4% interest.
  • The seller agrees to sell the home for $200,000.
  • The buyer puts down $20,000 and finances $180,000 with the seller at 8% interest.
  • The buyer pays the seller each month; the seller uses that money to pay their original 4% loan, pocketing the extra interest as profit.

How Does a Wrap Work?

  1. Seller’s loan remains in place (not paid off at closing).
  2. Buyer gets a new loan from the seller for the full balance (minus down payment).
  3. Buyer pays seller, usually at a higher interest rate.
  4. Seller pays original lender using the buyer’s payments, keeping the difference.

Sample Amortization of a Wrap

Let’s use the example above:

  • Seller’s original mortgage:
    • $100,000 at 4%, 30 years
    • Monthly payment: ~$477
  • Buyer’s wrap mortgage:
    • $180,000 at 8%, 30 years
    • Monthly payment: ~$1,321

Amortization Snapshot: Year 1

MonthBuyer’s Payment (8%)Seller’s Payment (4%)Seller’s Monthly SpreadPrincipal Paid (Buyer)Principal Paid (Seller)
1$1,321$477$844$121$144
2$1,321$477$844$122$144
3$1,321$477$844$123$145
………………
12$1,321$477$844$132$148
  • Buyer’s first payment: $1,321 (covers both interest and principal at 8%)
  • Seller pays $477 to their original lender (at 4%)
  • Seller’s spread/profit: $844/month (difference in payment, not counting principal changes over time)

Note: Over 30 years, the spread decreases as the principal drops, but the general idea is that the seller profits from the difference in interest rates and loan sizes.

Risks & What to Watch For

  • Due-on-sale clause: Many mortgages allow the lender to call the loan due if the property is sold. While rarely enforced if payments are made, this risk always exists.
  • Trust factor: The buyer is trusting the seller to keep paying their original lender.
  • Legal paperwork: Always work with a real estate attorney and escrow company to ensure payments are handled properly and everyone is protected.

Legal Disclaimer

Disclaimer:
This blog post is for educational purposes only and does not constitute legal, financial, or tax advice. Wraparound mortgages involve unique risks and legal considerations that vary by state. You should always consult with a licensed real estate attorney and financial advisor before entering into any seller financing, wraparound, or creative financing arrangement. The examples provided are for illustration only and may not reflect your specific circumstances.

Ready to Learn More?

Thinking about using a wraparound mortgage in your next real estate deal? Contact our team for a free consultation—we specialize in creative financing and can guide you through every step!

 real estate, home buyer, investors

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