Wraparound mortgages are a powerful tool for real estate investors, offering high profit potential with low liability. By structuring deals creatively, you can generate cash flow and long-term income from properties with little to no equity. While this strategy involves many moving parts, understanding how wraps work and when to use them can transform your business.
If you’ve ever wondered how to make more money with less risk in real estate, this guide to wraparound mortgages will walk you through the process in clear, straightforward steps.
What Is a Wraparound Mortgage?
In simple terms, a wraparound mortgage happens when you finance a buyer while keeping an existing loan in place. The new loan, or “wrap,” is for a higher amount than the underlying debt. You earn the difference in payments between the two loans as your profit.
For example, suppose you buy a house using a subject-to transaction (you take over the seller’s mortgage payments). Later, you sell the house on a wraparound mortgage, charging the buyer a higher interest rate, monthly payment, and sale price. This is where you create cash flow and long-term financial benefits.
Wraparound mortgages can be built on various types of underlying liens:
- Subject-to liens from existing bank loans
- Private money loans
The key is that the higher payment on the wrap loan produces consistent monthly cash flow.
How Does a Wraparound Mortgage Work?
Let’s break it down with numbers.
Imagine you take over a house subject-to with the following terms:
- $80,000 loan balance
- 5.25% interest rate
- 22 years remaining
- $511.59 monthly payment
Now you sell the house on a wrap for:
- $100,000 sale price
- $10,000 down payment from the buyer
- $90,000 wrap loan balance
- 9.5% interest rate
- 30-year term
- $756.77 monthly payment
Each month, you collect $756.77 from the buyer but only pay $511.59 toward the underlying mortgage. The difference—$245.18—is your cash flow. This continues for the 22 years the original loan exists.
When the underlying loan is fully paid, you keep the full $756.77 monthly payment for another 8 years. Plus, you already collected the $10,000 down payment upfront (minus any closing costs).
Why Buy Subject-To and Sell on a Wrap?
Let’s examine why subject-to transactions and wraparound mortgages work so well together.
Buying: Why Subject-To Makes Sense
Buying properties subject-to lets you take over an existing mortgage without creating an entirely new loan. This provides several advantages:
- Lower Payments: You’re only paying the original lender’s terms, which often include lower interest rates and smaller balances.
- Flexible Seller Negotiations: You can create a second lien to satisfy the seller’s desired contract price while keeping your payments manageable.
Here’s a comparison of two methods for a $100,000 house:
Scenario 1: Purchasing with a Wraparound
- $90,000 wrap loan balance
- 6% interest
- 15-year term
- $759.47 monthly payment
- $46,704 total interest paid over 15 years
Scenario 2: Purchasing Subject-To with a Second Lien
- $60,000 underlying loan balance at 3% interest ($415/month)
- $30,000 second lien at 6% interest ($253/month)
- $667 total monthly payment
- $30,150 total interest paid over 15 years
By using a subject-to with a second lien, you save $17,000 in interest while keeping the seller happy with a $90,000 contract sale price.
Selling: Why Wraps Work
When selling, a wraparound mortgage creates multiple profit streams:
- Cash Flow: The difference between the payments on the wrap loan and the underlying loan.
- Longer Terms: Selling with a 30-year wrap allows you to continue collecting payments after the underlying loan is paid off.
- Upfront Down Payment: Buyers typically provide 5-10% upfront, which boosts your immediate returns.
Wraps even provide a backup plan. If your buyer defaults, you can foreclose and sell the house again, often at an even higher profit.
Example of a Wraparound Sale
Here’s a complete breakdown of a $100,000 sale using a wrap:
- Acquisition: Purchase subject-to for $80,000 (balance of original loan).
- Sales Price: Sell for $100,000 with $10,000 down.
- Wrap Loan: Buyer owes $90,000 at 9.5% for 30 years ($756/month).
- Underlying Loan: Original $80,000 at 5.25% ($511/month) for 22 years.
Profits
Year 1-22 (while paying underlying loan):
- $245/month cash flow ($756 – $511)
- 22 years of cash flow = $64,680
Year 23-30 (after underlying loan is paid):
- $756/month for 8 years
- 8 years of cash flow = $72,576
Down Payment (net after $3,000 agent fees):
Total Profit: $144,256 over 30 years, from a house with just $20,000 equity.
Why You Only Act as the Bank
When selling on a wrap, you’re not the landlord—you’re the bank. Your buyer handles property taxes, insurance, and repairs. Whether their toilet breaks or the roof leaks, it’s not your responsibility.
Your sole concern is receiving the payments on time. If they fail to pay, you foreclose, resell, and potentially double your profit in the long run.
Common Mistakes to Avoid
Here are some quick tips to help you avoid rookie errors:
- Prioritize Principal Over Interest: Higher principal ensures you earn more if the buyer sells, refinances, or you sell the note.
- Verify Buyers with an RMLO: Use an RMLO (Residential Mortgage Loan Originator) to ensure buyers can afford their payments and comply with Dodd-Frank Act rules.
- Pass Closing Costs to Buyers: It’s standard in wrap sales for buyers to cover attorney fees, RMLO services, and title searches.
Wraparound Mortgages: The Key to Profitability
Wraparounds are one of the most profitable strategies in real estate. They allow you to earn cash flow, build long-term wealth, and eliminate the responsibilities of property management.
By combining subject-to-deals with wraparound sales, you harness the power of leverage and arbitrage to create income streams far beyond traditional investments.
Ready to dive deeper into creative finance? Learn more about subject-to, owner financing, and Dodd-Frank compliance to make your next deal airtight. Start building your financial future today!
