What is a wrap mortgage?

A wrap mortgage, also known as a wrap-around mortgage or simply a “wrap,” is a financing arrangement in real estate that allows a buyer to assume your existing mortgage while providing you with additional financing. It’s an alternative method of financing a home without the need for the buyer to qualify for a new mortgage from a traditional lender. 

Here's how a wrap mortgage works:  

• Agreement. You and the buyer agree on the terms of the wrap mortgage, including the interest rate, payment schedule, and the total amount of the new loan. 

• Buyer’s Payments. The buyer makes monthly payments to you for the new loan amount, which includes your existing mortgage payment plus the additional financing amount. 

• Seller’s Payments. You continue to make mortgage payments to the original lender for your existing mortgage.

• Wrap Margin. The difference between the interest rate on your existing mortgage and the interest rate charged by the buyer on the new loan is known as the “wrap margin.” This margin represents the profit you earn on the additional financing you provided to the buyer.

Here is an explanation of how a wrap mortgage might benefit you:

• Higher Interest Income. You earn interest on the additional financing you provided to the buyer, which can be higher than what you would earn from a bank account or other investments. 

• Flexible Terms. You can negotiate the terms of the wrap mortgage, allowing for greater flexibility in structuring the deal to meet your financial needs. 

• Attracting Buyers. Offering a wrap mortgage can make your home more attractive to potential buyers, as it provides an alternative financing option.

It’s important to note that wrap mortgages come with risks and complexities. As such, a real estate attorney will be consulted with in order to make sure all parties understand the legal and financial implications, assess the risks involved, and ensure compliance with all applicable laws and regulations.