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With all the different types of mortgages out there, you may be wondering what exactly is a wraparound mortgage. A wraparound mortgage exists where one has a financial arrangement in which an existing mortgage (e.g. an existing home loan) is refinanced. The additional money that is borrowed is charged at an interest rate that is somewhere between what the old loan's interest rate was and the current market interest rate. The lender passes through partial loan payments to the original lender. They do this by wrapping (combining) the remaining old loan with the brand new loan. After this, the borrower makes one monthly payment.
The lender ears a higher yield on wraparound mortgages than on a new mortgage loan. This is because the wraparound mortgage lender advances the difference between the combined principal of both loans and the part of the mortgage that has yet to be paid. The wraparound rate is calculated on the new total debt of the borrower.
Therefore, a wraparound mortgage is another alternative to assist a borrower refinance their entire loan when they need additional funds. It is a good alternative as it allows the borrower to take advantage of the hopefully lower interest rate gained from the first mortgage without the demands that taking out a second loan creates such as cash flow demands.
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