What Is a Wraparound Mortgage?

A wraparound mortgage — also called an all-inclusive trust deed (AITD) or "wrap" — is a form of seller financing in which the seller's existing mortgage stays in place while the buyer signs a new, larger note that "wraps around" it. The buyer makes one payment to the seller; the seller keeps making payments on the original loan and pockets the difference.

A concrete example

Suppose a seller owes $250,000 at 4% on their existing mortgage ($1,194/month) and sells the home for $350,000. The buyer puts $25,000 down and signs a $325,000 wrap note at 7.5%, amortized over 30 years ($2,272/month) with a 7-year balloon. Each month the seller collects $2,272, pays $1,194 to the bank, and keeps roughly $1,078 in spread. At the balloon, the buyer refinances, the wrap pays off, the underlying loan is retired, and the seller keeps the difference between the two balances.

Why the seller's yield is so high

The seller earns 7.5% on the full $325,000 while paying 4% on $250,000 of it — money that belongs to the bank. The seller's own capital in the deal (the equity financed) is only about $75,000, yet the spread income is calculated on the whole note. Measured as an internal rate of return on that equity, wrap yields of 15–30% or more are common. The wraparound calculator computes this IRR precisely, along with a dual amortization table of both loans.

The risks

Due-on-sale clause: nearly every conventional mortgage allows the lender to demand full payoff when the property transfers. Wraps technically trigger it. Lenders rarely call performing loans, but the risk is real. Payment risk: if the seller pockets the buyer's payment without paying the underlying lender, the property heads to foreclosure — which is why a neutral third-party servicer should collect and disburse payments. Timeline risk: an underlying balloon that comes due before the wrap balloon forces the seller to refinance mid-deal. The calculator flags this in red automatically.

When wraps make sense

Wraps shine when the underlying rate is far below market, when the buyer can't qualify for bank financing, or when the seller wants income instead of a lump sum. They require careful documentation — always involve a real estate attorney.