A financing arrangement that is used as an alternative to refinancing an entire existing mortgage loan. The existing assumable loan is combined with a new loan at an interest rate between the rate on the old loan and the current market rates. The monthly payment is then changed to be made out to the second lender, who first passes a portion of the loan payment to the original lender, and then wraps the remainder of the old loan with the new loan.

Also called an "all inclusive mortgage".

Bankapedia's Take

You may be thinking this a warp-Around mortgage sounds a lot like an assumable mortgage. Well for the most part it is, in fact an the seller needs to have an assumable mortgage in order to legally extend a wrap-around mortgage to the borrower. In a wrap-around mortgage, the seller is essentailly allowing the borrower to assume whatever loan they currently have on the property and in addition pay the remainder of the purchase price(the sales price - the sellers current lien) directly to the seller.

Sounds a bit confusing I know, so let me try and break it down a little simpler. Lets say a borrower has agreed to purchase a house from the seller for $400,000. Problem is, the borrower, who has decent income but not great credit, can't seem to get financed. The seller takes a look at the borrowers income statements, job history, savings, credit etc. and determines that the borrower isn't much of a credit risk. So he decides to extend the borrower credit directly. The seller still owes $200,000 on the property so if the borrower pays the seller directly, a portion of the payment will go to the bank and a portion to the seller. If a mortgage is smply assumed, the borrower pays the bank and has no other liens with the seller. With a wrap-around, the borrower is basically paying 2 entities- the bank and the seller.

Risks of a Wrap-Around 

There are risk inherent to both the borrower and seller in a wrap-around.

1. If the borrower fails to pay the seller, the seller is either forced to pay the bank directly out of their own pocket, or risk going into foreclosure, in which they would be out their original equity. The bank has the first lien on the property and will collect all the initial money on a foreclosure sale. Chances are the seller will lose all or most of their equity in this case.

2. If the borrower pays the seller, but the seller does not in turn pay the bank, the house could be foreclosed on and the borrower could be out on the street despite paying their payments on time.

3. The seller doesn't have an assumable mortgage, but engages in a wrap-around mortgage. The bank finds this out- and probably has a  a clause in the initial loan, that allows them to "call the loan". This results in the same in the same fate as risk #2 - a foreclosed house, despite a dilligent borrower.  In a declining real estate market, the bank doesn't care if you 10 yr old cousin is making your mortgage payments with his paper route money, as long as someone is. In a market where nthe lender can get more money in foreclosure than they are owed on the property, assumable mortgages are more heavily enforced.