Mortgage Wrap Around Agreement: Understanding the Basics
A mortgage wrap around agreement, also known as a wrap, is a financing arrangement where a lender assumes the responsibility of paying off an existing mortgage and issues a new loan to cover the remaining balance. This type of agreement is commonly used in situations where the existing mortgage has lower interest rates than the current market rate, and the buyer can benefit from paying off the existing loan while taking advantage of lower rates.
In a mortgage wrap around agreement, the buyer makes payments to the lender, who in turn makes payments on the underlying mortgage. The wrap-around mortgage is essentially a second mortgage that “wraps around” the first, with the buyer`s payment covering both the underlying mortgage and the new loan.
One of the benefits of a wrap-around mortgage is that the buyer may be able to secure more favorable terms than a traditional mortgage. For example, a wrap-around mortgage may have a lower interest rate than a standard mortgage, and the buyer may have more flexibility in terms of the down payment and loan term.
However, there are some risks involved with a wrap-around mortgage. For one, the lender assumes the risk of the underlying mortgage, which means that if the borrower defaults on the wrap-around mortgage, the lender must continue to make payments on the original mortgage. Additionally, the lender may not have legal ownership of the property until the wrap-around mortgage is paid off, which could complicate matters if the borrower falls behind on payments or tries to sell the property.
When considering a mortgage wrap around agreement, it is essential to work with a reputable lender who has experience in this type of financing arrangement. It is also important to carefully review the terms of the agreement to ensure that it is the right option for your financial situation and goals.
In conclusion, a mortgage wrap around agreement can be a viable option for buyers looking to take advantage of lower interest rates while paying off an existing mortgage. However, it is important to carefully consider the risks involved and work with a knowledgeable lender to ensure a successful transaction.