Wraparound Mortgage

Wraparound Mortgage — In a wraparound arrangement, the seller creates a new note for the total financed amount — which includes the unpaid balance of the original mortgage — typically at a higher interest rate. The seller profits from the spread between the interest rate charged to the buyer and the rate owed on the underlying loan. The original mortgage remains in place, and the seller stays responsible for making those payments from the proceeds received from the buyer.

Wraparound notes carry unique risks that secondary-market investors must evaluate carefully. The most significant concern is the due-on-sale clause in the underlying first mortgage, which could allow the original lender to call the loan due upon discovering the transfer. Investors should also verify that the seller is current on the underlying mortgage, since a default on the wrapped loan jeopardizes the buyer's position regardless of their own payment history. Despite these risks, wraparound notes can offer above-market yields and are a recognized creative financing tool in the note-investing space.