What financial advantage does a wraparound loan provide to the seller?

A wraparound loan offers a unique financial advantage for the seller, primarily through the profit derived from the interest differential. In a wraparound loan, the seller retains the original mortgage on the property but offers a new mortgage to the buyer that includes the existing loan. The new loan is typically at a higher interest rate than the seller's existing mortgage.

As the buyer makes payments on the wraparound loan, the seller continues to pay the original mortgage, keeping the difference in interest. This setup allows the seller to generate additional income from the interest payments while still ensuring that the original mortgage is serviced. Consequently, the seller benefits financially from the higher interest rate on the buy side compared to the rate on their existing mortgage.

This mechanism not only provides cash flow for the seller but also allows them to potentially understand and control the terms of the financing arrangements more conveniently.