What does the term “wrapping” mean in mortgage financing?

The term "wrapping" in mortgage financing refers to the process of bundling an existing mortgage with newer financing into a single loan. In this arrangement, the original mortgage remains in place, and a new mortgage (referred to as the "wraparound" mortgage) is created that encompasses both the existing mortgage and the additional financing. This can be an advantageous solution for buyers and sellers in certain situations, as it allows the buyer to make payments on the combination of loans, often at a higher interest rate than the existing mortgage. This way, the seller can receive the difference in payments, potentially enabling a profitable arrangement while easing the buying process for the new homeowner.

This option is distinct from refinancing, which focuses solely on modifying the conditions of an existing loan. Creating a new mortgage separate from existing loans indicates a different strategy where the existing loans are not integrated, and simply increasing the interest rate on an existing loan does not encapsulate the concept of "wrapping," which involves both integration and a blended financial product.