What is a "wraparound mortgage"?

A wraparound mortgage is best described as a financing method where a new mortgage wraps around an existing loan. This approach allows a seller to finance the purchase of their property by creating a new mortgage that encompasses the amount owed on the existing loan. Essentially, the borrower makes payments on the new mortgage, which then covers the payments on the original loan, allowing the seller to continue their existing financing arrangements while facilitating an easier transaction for the buyer.

The notion of a wraparound mortgage enables the seller to potentially benefit from a higher interest rate compared to the underlying loan, while the buyer may benefit from more favorable terms than they might get through traditional financing. This arrangement is particularly useful in situations where the existing loan has favorable terms that the buyer wants to maintain.