Definition
A wrap-around mortgage is a form of seller financing that “wraps” around an existing mortgage you still owe, which stays in place rather than being paid off at closing. The buyer makes payments to you on a new, larger note, and you use part of that money to keep paying your original lender. It lets a seller capture the spread between the old loan's interest rate and a higher rate charged to the buyer, but it's a genuinely risky structure, since most mortgages include a due-on-sale clause the original lender could enforce once the property changes hands. Because you remain personally responsible for the underlying mortgage, you're trusting the buyer to pay you reliably enough that you can keep making those payments yourself. This structure works best with careful legal drafting and a buyer you genuinely trust, given how much can go wrong if payments stop.
Example
Nadia owed $150,000 on her mortgage at 3.5% interest and sold her home for $230,000 using a wrap-around note at 6.5%, keeping her original loan in place rather than paying it off at closing. Her buyer paid her monthly, and she used part of each payment to keep her original loan current with the bank, pocketing the difference between the two interest rates as extra income. It worked well for over a year, but Nadia eventually consulted an attorney about the due-on-sale risk before continuing, since her underlying lender technically had the right to call the loan due in full once the transfer became known to them. She also opened a dedicated account just to track the wrap payments and make sure her original mortgage never fell behind. She decided the extra income was worth the risk in her particular situation, but only after fully understanding what could go wrong if her buyer ever stopped paying. Two years in, both loans remained current and Nadia was still collecting her monthly spread without incident.