The wraparound loan is for an amount and interest rate that are higher than the original (for example, the original is for $50,000 at five percent, the wraparound is for $60,000 at six percent).

The new owner pays the original owner monthly payments until the wraparound loan is paid. Meanwhile, the original owner uses that money to pay the original loan, ultimately ending up with a profit (in this case, $10,000 plus one percent interest for the term of the wraparound loan).

NOTE THAT THIS TYPICALLY ONLY WORKS WITH ASSUMABLE LOANS. TODAY ONLY FHA AND VA LOANS ARE ASSUMABLE WITHOUT THE LENDER?S PERMISSION. YOU SHOULD NOT DO THIS TYPE OF TRANSACTION WITHOUT THE EXPLICIT PERMISSION OF THE LENDER FOR THE ORIGINAL [UNPAID] MORTGAGE.

• advantages: Both parties can benefit because they can avoid closing costs.

  The borrower can benefit because the down payment can be kept low and can avoid the hassle of a conventional mortgage.

  The seller can benefit because of potential profit from the additional interest, as well as certain capital gains tax advantages.

• disadvantages: Both parties run the risk of issues that involve default (missing payments) and foreclosure (when the lender takes the house after default).

  If the new owner defaults, the original owner risks foreclosure if he or she cannot find an alternative means to pay the mortgage.

  Likewise, if the original owner defaults and the home is foreclosed, the new owner loses the property (and likely any money paid to the original owner).