What is a Wrap-Around Mortgage?

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What is a Wrap-Around Mortgage?

A Wrap-Around mortgage is a type of loan wherein a borrower takes out a second mortgage loan to help guarantee payments on their original mortgage.  Here, the borrower will make payments on both of the mortgages to the new lender, who is called the “wrap-around” lender.  The wraparound lender will then make the payments to the original mortgage lender.

Wrap-around loans can be attractive to the borrower because the wraparound usually offers the wraparound mortgage at an interest rate that is lower than market prices, though still a bit higher than the original loan. 

This can allow the borrower to obtain a loan at a lower interest rate than if they had gotten a completely new loan.  Once they have secured the wraparound loan as security for the original mortgage, the borrower may be able to avoid certain measures like foreclosure.

Aren’t Wrap-Around Mortgages the Same as a Second Mortgage?

Not exactly- with a second mortgage, the old mortgage is generally repaid.  On the other hand, with a wrap around mortgage, the original mortgage is still active, and the borrower begins making payments for both the old mortgage and the new one, to the new lender.

Both wrap-around mortgages and second mortgages can be a form of “seller financing”, which means that the lender is also the seller.  However, as mentioned, the old mortgage usually needs to be paid off before the borrower can take out a second mortgage.

Are Wrap-Around Mortgages Legal?

Yes, wrap-around mortgages are generally held to be legal.  However, their use in the real estate market has dwindled in recent years due to several factors.  One of the main concerns involves the increased use of “due on sale” clauses in many mortgage agreements.

A due-on-sale clause basically requires the borrower to pay the entire balance of a loan whenever the property has sold.  This makes it much more difficult to arrange for a wrap-around mortgage, and instead the borrower must usually take out a second mortgage in the manner mentioned above.

Thus, with wrap-around mortgages, there is a high risk that the lender may choose to enforce a due-on-sale clause if there is one in any of the mortgage loan documents.  However, there are a few limited situations where the lender doesn’t use these clauses, or when the due on sale clause isn’t enforceable.  These types of exceptions may be complicated and can require the assistance of real estate attorney.

Should I Hire a Lawyer if I Have a Legal Dispute Involving a Wrap-Around Mortgage?

Wrap-around mortgages can often eliminate some of the barriers to home loan approval and can make the process of purchasing a home much quicker.  However, they can give rise to legal disputes, such as when the lender and the borrower have a conflict over loan repayment clauses.  You may wish to contact an experienced real estate lawyer in your area if you need help with a wrap-around mortgage.  Your attorney can advise you on your legal options, and can represent you during court hearings if needed.

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Last Modified: 11-14-2012 04:16 PM PST

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