What is a wraparound mortgage?

A wraparound mortgage is a financing arrangement that allows the seller to provide the buyer with a loan that encompasses both the existing mortgage on the property and any additional amount needed to complete the sale. This type of loan creates a new mortgage that "wraps around" the existing loan, effectively consolidating both the seller's current mortgage and the buyer's purchase price into a single new mortgage.

In this structure, the seller continues to make payments on the existing mortgage while receiving payments from the buyer, typically at a higher interest rate. The seller benefits from the difference between the interest rate on the wraparound mortgage and the existing loan, while the buyer gains access to financing without needing to negotiate a separate loan with a bank or lender.

The other choices do not accurately describe a wraparound mortgage. A loan covering only the buyer's equity pertains more to equity loans or second mortgages, which focus specifically on the buyer's investment rather than incorporating existing debts. A loan for new construction typically refers to financing that is specifically designed for building new properties, differing fundamentally from the wraparound concept. Lastly, a short-term loan with high-interest rates is more characteristic of a hard money loan or bridge loan, which is not aligned with the structure and purpose of a wraparound mortgage