What is a "wraparound mortgage"?

A wraparound mortgage is a specific financial arrangement where a new mortgage is created that encompasses an existing mortgage. This type of financing allows a borrower to secure additional funds while the original mortgage remains in place. The new loan effectively "wraps around" the existing loan, meaning that the borrower makes payments to the new lender, who then pays the original lender. This can be beneficial for both parties: the borrower can access additional financing without needing to pay off the existing mortgage upfront, and the new lender has a secured interest in the property, often at a higher interest rate, which compensates for the increased risk.

This approach can be particularly useful in situations where traditional refinancing options are limited or the borrower wants to avoid a lengthy approval process. Additionally, wraparound mortgages can sometimes allow borrowers who have favorable terms on their original loan to maintain those while accessing new capital. The structure of this mortgage facilitates complex transactions, often seen in real estate investments and seller financing scenarios.