What is a wrap-around mortgage?

• A. A new mortgage that encompasses existing mortgage
• B. A second mortgage exceeding the first
• C. A type of adjustable mortgage
• D. A loan for mortgage refinancing

Answer: (A)

A wrap-around mortgage refers to a financing arrangement where a new mortgage is created that includes the outstanding balance of an existing mortgage as part of its total. This type of mortgage allows a buyer to make payments to the seller, who in turn continues to make payments on the existing mortgage. The wrap-around mortgage effectively "wraps around" the existing obligations, allowing the seller to keep the original mortgage in place while providing new financing to the buyer.

This financial instrument can be advantageous for buyers who may not qualify for traditional financing, as well as for sellers who benefit from retaining a lower interest rate on their original mortgage while potentially realizing a profit from the wrap-around arrangement. The transaction can be beneficial in situations where interest rates have risen since the original mortgage was obtained, thus allowing the buyer to secure more favorable terms through negotiation with the seller.