Wraparound loans help to provide a source of additional loan revenue when a pre-existing loan is already in place. Essentially, the wraparound loan functions by encompassing the outstanding amount due on the existing loan, advancing an additional amount to the borrower, then uses the payments made on the new loan to continue paying off the original loan. This strategy makes it possible for the borrower to obtain the needed extra funds without creating another obligation that the borrower must make payments on each month.
The wraparound loan is a common means of working with an existing mortgage without actually taking out a second mortgage or refinancing the existing obligation. Homeowners may choose to employ this approach as a way of managing to continue to make mortgage payments while still obtaining funds to make improvements to the home. Because the homeowner makes a payment to the lender that extended the wraparound loan, he or she does not have to be concerned about making the mortgage payment any longer.
Since the original mortgage loan continues to exist, The holder of the wraparound loan will take over making payments on that debt. Essentially, the loan holder receives payment from the borrower, then uses a portion of that payment to make the monthly mortgage payment. For this reason, it is important to schedule the due date for each installment on loans of this type so that the monthly payment on the original mortgage can be received and applied on time.
Depending on the circumstances, the interest rate on the wraparound loan may be lower than the rate that a homeowner could command on a second mortgage. If the original mortgage has a lower fixed rate, using this type of loan can easily be compared to what would be the ultimate cost to the borrower for a second mortgage, and determine which scenario is better in the long run. Often, choosing to go with a wraparound loan rather than taking out an additional mortgage can mean a substantial amount of savings for the homeowner.