A seller wants $120,000 for a home and still owes $20,000 of the original loan at 7% interest. The current interest rate is 12%. A buyer can pay…

This scenario describes a wraparound mortgage. A wraparound mortgage is a form of seller financing where a new, larger mortgage is created that includes, or "wraps around," the seller's existing mortgage. The buyer makes a single payment to the seller on the new loan. The seller then uses a portion of this payment to continue servicing their original, underlying loan, which remains in place. The new loan amount ($60,000) consists of the seller's existing loan balance ($20,000) plus the additional amount financed ($40,000). The seller profits from the positive spread between the interest rate they receive (10%) and the rate they pay (7%).

A. blanket: A blanket mortgage is a single loan used to finance multiple parcels of real property, not a structure involving an existing loan.

B. equity: An equity loan is secured by the equity in a property. While related, it does not describe this specific financing arrangement involving a new loan subsuming an old one.

D. buydown: A buydown involves paying an upfront fee (points) to a lender to reduce the interest rate for a set period, which is not occurring here.

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1. Ling, D. C., & Archer, W. R. (2018). Real Estate Principles: A Value Approach (6th ed.). McGraw-Hill Education.

Reference: Chapter 11, "Residential Mortgage Types and Borrower Decisions," Section on "Other Mortgage Arrangements," describes a wraparound mortgage as a second mortgage that includes the seller's existing mortgage. The buyer makes payments to the seller, who continues to pay the original lender.

2. Jacobus, C. J. (2021). Real Estate Principles (13th ed.). Dearborn Real Estate Education.

Reference: Chapter 12, "Financing the Real Estate Transaction," defines a wraparound mortgage as a financing tool that allows a borrower to obtain additional financing on a property while keeping an existing loan in place. It also defines a blanket mortgage (p. 248) and a buydown mortgage (p. 243) with distinct characteristics not present in the question's scenario.

3. Brueggeman, W. B., & Fisher, J. D. (2019). Real Estate Finance and Investments (17th ed.). McGraw-Hill Education.

Reference: Chapter 9, "Residential Mortgage Types and Borrower Decisions," details various non-traditional mortgage instruments. It explains that with a wraparound loan, the new lender (or seller) makes payments on the existing loan while the borrower makes payments to the new lender on the larger, wraparound loan.