A wraparound mortgage is a unique loan that benefits both buyers and sellers. Keep reading for a comprehensive guide on how it works and who it benefits.
Wraparound mortgages have been around for less than 50 years, dating to a late 1970s spike in interest rates.1 Sellers were driven to get creative when inflation hit and rates rose past what buyers could afford. Sound familiar?
Wraparound mortgages are a rare type of seller financing that comes with both valuable pros and serious cons. There are circumstances where a traditional mortgage loan may not be ideal. If you’re finding it challenging to sell your home, and don’t mind some risk and profit opportunity with your financial dealings, a wraparound mortgage may be for you.
Exactly what is a wraparound mortgage? It’s a type of assumable mortgage that wraps seller financing around an ongoing mortgage. It combines:
Instead of paying off a mortgage after selling to a buyer with their own lender shelling out the money, the seller keeps their existing loan and repays it using payments they receive from the buyer.
Consider this wraparound mortgage example:
Let’s say John sells his home to Anne. John’s property is valued at $250,000, and he has $100,000 left to pay on an assumable mortgage with a 4.5% interest rate.
Anne signs a promissory note to John to pay him $230,000 over 25 years at 5.75% interest and starts with a 5% down payment of $11,500. Each month, she pays $1,447.2
John continues to pay down his mortgage—he has 15 years left on a 30-year loan for $150,000 (the original purchase price of the property) and his monthly payments are $760.2
Even though John sells to Anne below market value, he benefits by:
As for Anne, she’s able to:
To help John and Anne reduce some of the risks on both sides and particularly to avoid the potential for primary mortgage default:
While there are pros and cons specific to each role, wraparound mortgages have some benefits that apply to both buyers and sellers.
Seller-based financing doesn’t come with cookie-cutter options like conventional mortgages and lender guidelines—how about a 23-year mortgage instead of 15 or 30 years? Or quarterly instead of monthly mortgage payments?
There’s room for creative financing options since these arrangements take place directly between a seller and a buyer, without conventional mortgage lenders between them.
Low interest rates mean that more buyers can afford to become homeowners, while high rates lead to fewer offers and more time on the market for sellers. Wraparound mortgages can break through these barriers on both sides, providing more potential buyers for the seller and affordable opportunities for buyers.
When interest rates are low, this type of seller financing is especially uncommon. But rates have risen sharply since the record low average of 2.65% in early 2021 for a 30-year fixed-rate mortgage to 7.03% in May 2024 (after a late 2023 7.79% spike).3
Sellers can profit by offering an interest rate higher than their original mortgage, potentially even higher than current market rates.
Buyers can profit with a better rate than they could otherwise lock in—whether that means lower than current market rates or lower than they could achieve based on qualifying factors such as a poor credit history.
A wraparound mortgage is in junior or second place in terms of property liens. This means that if payments aren’t made—regardless of whose fault it is—the original mortgage lender has the ability to recoup their losses before any other party receives sale proceeds.
For homeowners considering selling a home, understanding the financial implications, including lien priorities like those involved in wraparound mortgages, is crucial.
Are you one of the exceptions to the “they’re not for everyone” statement when it comes to wraparound mortgages? Consider your skills, habits, and risk tolerance, plus:
While it allows for rewards, wraparound mortgages involve high risks on both sides. Do you wonder about other ways to handle your mortgage, like “Can you sell your house and keep the mortgage”? Truehold is the resource you need. If you’re a homeowner worried about interest rates and looking for an alternative to a conventional sale, there’s another financing option to consider: Truehold's sell and stay transaction.
If you’re looking to avoid rising interest rates and stress of a traditional sale, we’re here to help. Truehold's sell and stay transaction allows you to unlock your home equity, debt-free, and continue living in your home as a renter.
Call (314) 353-9757 today to get started.
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