Real Estate Terminology

A special form of second or junior mortgage granted against security of a property that is already mortgaged, whereby a new mortgagee assumes (that is, takes over) the obligation to pay interest and principal on the existing or in–place’ mortgage (without assuming or extinguishing that mortgage, which retains its priority) and makes a further wrap–around’ advance to the mortgagor. "A junior mortgage that secures a promissory note with a face amount equal to the sum of the principal balance of an existing mortgage note plus any additional funds advanced by the second lender. Wraparound mortgages may be used in several forms. … Typically, however, wraparounds are either purchase–money mortgages, where the wraparound lender is either the real estate seller or a third party, or refinancing or non–purchase–money mortgages, where the lender is either the same lender that holds the first mortgage or a third party. See Arditto, The Wrap–Around Deed of Trust: An Answer to the Allegation of Usury, 10 Pac LJ 023 (1979), for a discussion of various types of wraparound mortgages." Mitchell v. Trustees of U.S. Mutual Real Estate, 144 Mich App 302, 375 NW.2d 424, 428 (1985). The face value of the wraparound mortgage is equivalent to the amount outstanding on the in–place’ mortgage, plus the additional funds advanced. The mortgagor undertakes to make payments to the new or subordinate mortgagee that are sufficient to cover that mortgagee’s cost of servicing the existing mortgage, plus the interest on the new advance. In turn, the wraparound mortgagee undertakes to make all payments to the first or in–place mortgagee. A wraparound mortgage may be taken out when an in–place mortgage is held at a favorable interest rate and, therefore, the mortgagor does not wish to refinance the entire mortgage arrangements. The interest rate, or blended rate’, on the wraparound mortgage is usually fixed at a rate between the in–place mortgage rate and the rate that would be charged if an entirely new advance was to be made. Sometimes called an overriding mortgage’, an ‘overlapping mortgage’, an all–inclusive mortgage’; or, if the loan is made by means of a deed of trust an all–inclusive deed of trust’. See also assumption, purchase money mortgage.

Terms in bold are defined elsewhere in the hard copy of the Encyclopedia.