What is a wraparound mortgage?

A wraparound mortgage is correctly defined as a combination of first and second mortgages, where the existing mortgage remains in place while a new, larger mortgage is taken out to cover both the existing loan and the buyer's purchase price. This structure allows the seller to wrap their original mortgage into a new financing agreement, which is then offered to the buyer. The buyer makes payments to the seller, who then continues to pay the original mortgage lender.

This type of mortgage can facilitate transactions, especially when the existing mortgage has a lower interest rate than current market rates, making it attractive for buyers who may face higher borrowing costs. Additionally, it can provide sellers with the benefit of receiving a stream of income as the buyer pays off the mortgage, sometimes at a higher interest rate than the original loan, increasing the seller's profit on the sale.

Other answer choices do not accurately describe a wraparound mortgage: a mortgage through multiple institutions pertains to a different type of financing; a reverse mortgage is specifically designed for homeowners aged 62 and older who wish to convert part of their equity into cash; and a loan requiring no down payment relates to specific loan types that may or may not involve a wraparound structure.