What is a wrap-around mortgage?

A wrap-around mortgage is a financing arrangement that essentially includes the remaining balance of an existing first mortgage, which is "wrapped around" by a new mortgage that typically covers an additional sum beyond what is owed on the original mortgage. This type of mortgage allows a borrower to refinance or purchase a property without paying off the existing mortgage immediately.

In this arrangement, the seller of the property may offer to keep the original mortgage in place while providing the buyer with a new mortgage that encompasses both the unpaid balance of the original mortgage and additional funds for the purchase. The buyer makes payments to the seller, who then makes payments on the original mortgage, facilitating a smoother transaction even if the first mortgage is being maintained.

This financial strategy can be beneficial in circumstances where the current interest rate on the existing mortgage is lower than the current market rates, allowing the borrower to assume those favorable terms while also accessing additional funds. Thus, the wrap-around mortgage serves as a practical solution for both buyers and sellers in real estate transactions.