Like a turducken, a wrap-around mortgage is a mortgage inside another mortgage. Unlike a turducken, wraps don’t get more delicious the more you wrap them. They just get riskier.
Photo by Christopher “Pacula” Corkum

I introduced the topic of a wrap-around mortgage in my last post, what we in the real estate industry call a wrap. Today, I want to step back from the politics of this topic and simply discuss what a wrap is.

Simply put, a wrap is a financial arrangement where a homeowner agrees to finance the sale of their home without paying off the underlying mortgage. The purchaser agrees to make payments to the original owner, who then uses that income to pay off the original mortgage. Typically, the subsidiary mortgage includes more debt at a higher interest rate than the original mortgage, resulting in positive cash flow for the seller.

An Example Wrap

I’ve seen situations similar to what I’m about to present. It’s one reason I used the turducken metaphor above.

• John bought a home for $150,000 a few years ago. He still owes $100,000 on a 30-year mortgage carried  at 4% for 30 years.
• John now want to sell that home for $200,000.
• Greta wants to buy the house, but for some reason she can’t get financing for the purchase price, even though she has a $20,000 down payment.
• John agrees to accept the $20,000 down payment and finance the $180,000 balance at 7% for 30 years.
• Greta makes monthly payments to John, who uses the money to pay his lower mortgage payment and pockets the remainder.
• In a few years, Greta may decide to seller-finance the property to Henry for $240,000 carried for 30 years at 9%, completing our mortgage turducken.

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