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Wrap-Around Mortgage
A wrap-around mortgage is essentially the same as a refinancing mortgage,
except that the new mortgage is granted by a different lender, who assumes
the payments on the existing mortgage, which remains in full force. The new
(second) mortgage is thus “wrapped around” the existing mortgage. The
"wrap-around" lender advances the net difference between the new
(second) mortgage and the existing mortgage in cash to the borrower, and
receives as net cash flow, the difference between debt service on the new
(second) mortgage and debt service on the existing mortgage.
When the terms of the original mortgage and the wrap-around are the
same, the procedures in calculating NPV and IRR to the lender and NPV
to the borrower are exactly the same as those presented in the preceding
section on refinancing.
Example 1: A mortgage loan on an income property has a remaining
balance of $200,132.06. When the load originated 8 years ago, it had a 20-
year term with full amortization in level monthly payments at 6.75% interest.
A lender has agreed to “wrap” a $300,000 second mortgage at 10%, with
full amortization in level monthly payments over 12 years. What is the
effective yield (IRR) to the lender on the net cash advanced?
9.5
200000
1,979.56 Monthly payment on new mortgage.
0
899.23 Net monthly payment (to lender).
133190 0
-66,810.00
Net amount of cash advanced (by
lender).
11.5
-80,425.02 Present value of net
0
-13,615.02 NPV to lender of net cash advanced
0
12
14.83 % nominal yield (IRR).
15.25
-65,376.72
Present value of net monthly
payment at 15.25%.
0
1,433.28 NPV to borrower.
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144.00
Total number of months remaining in
original load (into n).