Definition
An underlying mortgage, also referred to as a first mortgage, is the initial or primary loan secured by a piece of real estate. This mortgage holds priority over subsequent loans, meaning it must be satisfied first in the event of foreclosure.
Examples
-
Example 1: John owns a property with a first mortgage of $200,000. He needs additional financing and obtains a wraparound mortgage of $300,000, which includes the $200,000 underlying mortgage. The wraparound mortgage provides $100,000 of new financing.
-
Example 2: Maria wants to purchase a new warehouse to expand her business. There is an existing underlying mortgage of $150,000 on the property. She arranges a new wraparound loan of $250,000 with the seller, combining the existing mortgage with an additional $100,000.
Frequently Asked Questions (FAQs)
Q1: What is the primary characteristic of an underlying mortgage?
- A1: The primary characteristic is that it is the initial and principal mortgage loan on a property, holding priority over any future loans.
Q2: How does an underlying mortgage interact with a wraparound mortgage?
- A2: An underlying mortgage remains in place and is wrapped within the larger balance of the wraparound mortgage, with the additional funds provided by the latter.
Q3: What happens to an underlying mortgage if a property is foreclosed?
- A3: In the event of foreclosure, the underlying mortgage must be repaid before any subordinate mortgages or liens.
Related Terms
- Wraparound Mortgage: A type of mortgage that includes the balance of an existing underlying mortgage plus additional financing from the new lender.
- Subordinate Mortgage: A mortgage that ranks below another mortgage in terms of its claim on a property’s assets in case of foreclosure.
Online References
Suggested Books for Further Studies
- “Investing in Real Estate” by Gary W. Eldred
- “Real Estate Finance & Investments” by William Brueggeman and Jeffrey Fisher
- “The Real Estate Wholesaling Bible” by Than Merrill
Fundamentals of Underlying Mortgage: Real Estate Basics Quiz
### What is an underlying mortgage also referred to as?
- [ ] A subordinate mortgage
- [ ] A HELOC
- [ ] An adjustable-rate mortgage
- [x] A first mortgage
> **Explanation:** An underlying mortgage is also known as a first mortgage, as it is the initial loan on the property.
### What does a wraparound mortgage include?
- [ ] Only the additional financing needed
- [ ] The first mortgage and home equity line of credit
- [x] The underlying first mortgage and additional new financing
- [ ] Only the principal amount
> **Explanation:** A wraparound mortgage includes the balance of the underlying first mortgage combined with additional new financing.
### Who is paid first in case of foreclosure?
- [x] The holder of the underlying mortgage
- [ ] The holder of the wraparound mortgage
- [ ] The property owner
- [ ] The home equity line of credit provider
> **Explanation:** In the event of foreclosure, the underlying mortgage must be repaid first.
### What is the new money provided by a wraparound mortgage referred to as?
- [ ] Principal loan
- [x] Additional financing
- [ ] Subordinate loan
- [ ] Interim financing
> **Explanation:** The additional funds provided on top of the underlying first mortgage in a wraparound mortgage are referred to as additional financing.
### How does an underlying mortgage differ from a subordinate mortgage?
- [x] An underlying mortgage holds priority
- [ ] A subordinate mortgage holds priority
- [ ] Both have equal priority
- [ ] Depends on the loan amount
> **Explanation:** An underlying mortgage holds priority over subordinate mortgages regarding claims on property assets.
### What happens to the interest payments on an underlying mortgage during the term of a wraparound mortgage?
- [ ] They are capitalized into the wraparound mortgage
- [ ] They become nonpayable
- [x] They are paid by the wraparound mortgage holder
- [ ] They are deferred
> **Explanation:** In a wraparound mortgage, the interest payments on the underlying mortgage are often managed by the wraparound mortgage holder.
### What is the typical use of a wraparound mortgage?
- [ ] For refinancing personal loans
- [x] For combining an existing mortgage with new financing
- [ ] For short-term property financing
- [ ] Only for commercial properties
> **Explanation:** A wraparound mortgage is typically used to combine an existing underlying mortgage with new financing for the property owner.
### If a home is sold with an underlying mortgage intact, who is responsible for the mortgage payments?
- [ ] The new property owner
- [ ] The original mortgage lender
- [x] The wraparound mortgage holder
- [ ] Both the old and new property owner
> **Explanation:** In a wraparound mortgage arrangement, the wraparound mortgage holder is responsible for managing the mortgage payments.
### Can underlying mortgages include commercial properties?
- [x] Yes
- [ ] No
- [ ] Only residential properties
- [ ] Depends on the mortgage agreement
> **Explanation:** Underlying mortgages can indeed be applied to both residential and commercial properties.
### What is a key benefit of a wraparound mortgage?
- [ ] Lower-interest rates
- [ ] Less paperwork
- [x] Combining an existing mortgage with new financing
- [ ] Easier loan approval
> **Explanation:** A key benefit of a wraparound mortgage is that it combines an existing underlying mortgage with new additional financing, which is beneficial for meeting larger financial needs.
Thank you for utilizing our comprehensive guide on underlying mortgages and engaging with our quiz. Keep enhancing your knowledge in real estate finance!
