Wraparound Mortgage

In depth

In a wrap, the seller keeps their original mortgage in place and creates a new, larger note with the buyer at a higher interest rate. The buyer pays the seller, who then services the underlying loan. The spread between the two rates plus any equity wrap becomes the seller's profit. Misconception: wraps are not automatically illegal even when an underlying due-on-sale clause exists; they are a contractual risk, not a criminal act. Practically, buyers should require monthly proof that the underlying loan is paid, ideally through a third-party loan servicer that splits payments. Sellers must disclose the wrap structure and comply with Dodd-Frank when the buyer is an owner-occupant. Title insurance and a recorded memorandum protect the buyer if the seller defaults on the wrapped loan.