What does a wraparound mortgage loan encompass?

A wraparound mortgage loan is a type of financing that encompasses an existing mortgage along with an additional amount borrowed from the lender. In this arrangement, the wraparound loan "wraps around" the existing mortgage, providing the borrower with additional funds while the original mortgage remains in place. The borrower makes monthly payments to the wraparound lender, who then continues to make payments on the original mortgage, allowing the borrower to leverage their existing equity while receiving new financing.

This structure is often advantageous in situations where the existing mortgage has a low interest rate, and the borrower seeks additional funding without needing to refinance the original mortgage entirely. The wraparound mortgage enables homeowners to obtain financing that takes into account both the original loan amount and any additional funds they wish to borrow, serving as a combined solution.

The other options do not accurately capture the nature of a wraparound mortgage and its function in financing. For instance, a loan with no collateral does not apply as wraparound mortgages do involve collateral, which is typically the property itself. Similarly, describing it merely as additional financing or as a refinancing option with a lower interest rate does not encompass the integral aspect of combining the existing mortgage with the new loan amount. The wraparound mortgage specifically incorporates the first mortgage amount, distinguishing