Identification

• A wraparound mortgage involves two different lenders. The first lender holds the original existing loan on the property. The second lender assumes that loan, yet does not pay it off. The borrower pays the second lender the monthly mortgage fees at higher interest than the first, and the second lender pays the monthly mortgage fees to the first lender.
  
  

Purchase

• A wraparound loan can be used when purchasing a house with an existing loan. For example, if a seller is selling his property for $200,000, yet has an existing loan for $100,000 on the property, a wraparound loan might be used. The buyer would obtain a wraparound loan that provides $100,000 to the seller, yet instead of paying off the $100,000 to the first lender, the second loan will continue making payments on the first.
  
  

Refinance

• A wraparound loan can be used when refinancing a property to obtain additional cash, such as when making improvements. In a typical refinancing mortgage the new lender pays off the first lender, and gives the additional funds to the borrower. In a wraparound loan, instead of paying off the first, the second lender will make those payments to the first lender. The borrower, just as in a wraparound loan to make a purchase, will make payments to the second lender at a higher interest rate than the first. The borrower's payments will cover the expenses of all the funds borrowed.
  
  

Limitations

• A wraparound loan might be the desired choice for a borrower when the first loan has a hefty pre-payment penalty. It is also a way to refinance or finance property when a borrower is unable to come up with the entire ready cash necessary. A wraparound loan is only possible with the first lender's permission. A wraparound loan would not be allowed if the original loan contained a due-on-sale clause or an acceleration and alienation clause.
  
  

Considerations

• If the seller of the property is acting as the second lender in a wraparound mortgage, the buyer must protect herself to ensure that the first loan is being paid and does not go into default. One way to do this is to include a protective clause in the loan documents, granting the buyers the permission to make the payments directly to the first lender.