Calculating the Yield on a Wrap-around Mortgage

A wrap-around mortgage is a loan that is taken over by the buyer of the property from the seller. The buyer then pays off the seller and the seller in turn pays off the bank or any financial institution where the buyer used to have obligations. The yield is the difference between the original price of the loan to the new and larger loan.

Determine Original Loan Amount

This is the price of the original loan that is being taken over by the buyer of the property. The original loan amount is the amount the seller used to owe the bank or financial institution when he first purchased the property.

Determine New Loan Amount

This is the price of the new loan that the seller of the property is extending to the buyer. In effect, the seller is not shelling out money for the whole loan because the original loan is still being paid by the buyer through the seller.

Determine Interest Rates

Get the interest rates being charged by the bank on the original loan amount. Then get the interest the seller is charging for the new and bigger loan amount. The seller charges interest on the total wrap around mortgage, which includes the principal mortgage he took over.

Subtract Differences in Interest and Determine Yield

Once you’ve determined the interest rates for the original and wrap around mortgage, subtract the interest value of the original loan from the interest value of the new and larger wrap around mortgage. The difference between these two values will be the yield obtained by the seller by extending a wrap around mortgage to the buyer.