Understanding Wraparound Mortgages

A wraparound mortgage lets a seller keep financing in place while the buyer makes a single "wrap" payment that covers both loans: the buyer's new financing and the seller's underlying first mortgage. The seller pockets the difference each month. Because the wrap rate typically exceeds the underlying rate, the seller earns a spread — and once the underlying loan is retired, the seller keeps the full payment until the wrap term ends. Wraps are most common in seller-financed transactions where the buyer cannot qualify for bank financing; due-on-sale clauses in the underlying note can make them risky without lender consent.