A wrap-around mortgage is a home loan in which the lender takes on responsibility for a borrower's existing mortgage and a new borrower gets a new mortgage on the property. There are pros and cons to wrap-around mortgages and it is important to understand the details before considering applying for one.
Purpose
The purpose of a wrap-around mortgage is to permit more real estate transactions by people who might not otherwise be able to buy or sell their homes. For instance, if a woman has an existing mortgage of $200,000, and someone is willing to buy her house for $300,000, she gets to sell the property and release her liability for the original loan, provided that the lender assumes the first loan and the buyer pays the difference between the first and second.
Benefits to the Seller
According to the real estate website RealEstateAgent.com, wrap-around mortgages benefit sellers because they might be able to sell their home for a higher price. The seller might also be able to earn money back from the transaction in the case where the current interest rate is higher than the interest rate on the seller's existing mortgage.
Lender Benefits
The lender assumes responsibility for the first mortgage in a wrap-around loan. Even though this provides somewhat of a risk to the lender in the sense that it is an additional liability, there are some benefits to the lender as well. The financial advice website FinancialWeb.com states that lenders can make a lot of money from wrap-around mortgages because lenders can get lower interest rates and then charge a higher interest rate to the new borrower.
Assumable Loan
Only loans that can be assumed by a different borrower can be included in a wrap-around loan. RealEstateAgent.com states that in order for a loan to be assumable, the new borrower must meet the same qualifications that the existing borrower met when she qualified for the loan. For instance, a VA loan could only be assumed by another qualified veteran and with the permission of the lender.
Drawbacks
There is one major potential drawback to the seller in a wrap-around mortgage. Some loans have prepayment penalties or due on sale clauses written in to the loan paperwork. If the seller's original loan has a due on sale clause and they sell it to a new borrower without realizing there is a prepayment penalty, the seller will be required to pay off the remainder of the existing mortgage on their own, at the time of sale.
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