Definition
An underlying mortgage is the original mortgage on a property that remains in place when a new mortgage, known as a wraparound mortgage, is created. The underlying mortgage is typically the first mortgage and secures part of a property’s loan balance. The wraparound mortgage encompasses the balance of the underlying mortgage plus additional funds provided by the new lender.
Examples
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Scenario 1: A property has an existing $200,000 mortgage (the underlying mortgage). The owner obtains a wraparound mortgage of $300,000. In this case, the new loan includes the remaining $200,000 of the first mortgage plus $100,000 of additional funding.
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Scenario 2: Consider a situation where a homebuyer has an underlying mortgage of $150,000 on a house. They secure a wraparound mortgage for $220,000 total. This wraparound mortgage includes the $150,000 of the original debt and provides an additional $70,000 to the borrower.
Frequently Asked Questions (FAQs)
What is a wraparound mortgage?
A wraparound mortgage is a type of secondary financing for the purchase of real property. It’s often used when the borrower wants to avoid refinancing the existing lower-interest mortgage. Essentially, the wraparound mortgage includes the remaining balance of the original loan plus an additional amount.
How does the underlying mortgage affect the overall debt structure?
The underlying mortgage forms the core part of the total loan secured by the property. When a wraparound mortgage is added, the total debt becomes the sum of the wraparound mortgage amount, which includes the underlying mortgage balance plus the additional borrowed amount.
Why would a borrower choose a wraparound mortgage?
Borrowers might opt for a wraparound mortgage to take advantage of lower interest rates on the existing loan or to simplify the refinancing process. This setup can also be beneficial when the current loan has penalties for early repayment.
Who typically holds the underlying mortgage?
The underlying mortgage is usually held by a traditional lender or bank that provided the initial financing for the property.
Are there any risks associated with underlying and wraparound mortgages?
Yes, potential risks include the possibility of foreclosure if either the underlying or the wraparound loan payments are not met. Additionally, it may create a complex financial arrangement that requires careful management.
Related Terms
Wraparound Mortgage
A secondary financing arrangement where a new mortgage wraps around an underlying mortgage, combining it with additional funding into a single loan agreement.
Subordinate Financing
Any financing mechanism that places the lender’s claim after the claim of the primary or first-lien mortgage holder.
First Mortgage
The original or primary loan secured by a property, typically having priority over other liens or mortgages.
Lien
A legal claim or right against a property that must be paid off when the property is sold, often used as collateral for borrowing.
Loan-to-Value Ratio (LTV)
The ratio of the amount of debt secured by a property (including all mortgages) compared to the property’s appraised value.
Online Resources
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Investopedia’s Mortgage Guide: A comprehensive overview and guide about mortgages and financing options.
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National Association of Realtors (NAR) Mortgage Resources: Contains tools and resources related to mortgages.
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Fannie Mae’s Selling Guide: Official guidelines and policies concerning mortgages and housing finance.
References
- “Fundamentals of Mortgage Lending and Real Estate Finance” by Kimberly O’Connor.
- “Real Estate Financing and Debt Markets” by Carey A. Olson.
- “Mortgage and Real Estate Finance” provided by the Mortgage Bankers Association (MBA).
Suggested Books for Further Studies
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“The Mortgage Professional’s Handbook” by David L. Olson
- A comprehensive text for anyone involved in the mortgage industry.
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“Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
- A balanced use of theory and practice to illustrate connection between the institutional environment and financial theory.
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“Principles of Real Estate Finance” by Charles Floyd and Marcus Allen
- A book designed to be a standalone text for a real estate finance course, with coverage of real estate principles and applications.
