8 Real Estate
12c platinum / 12C
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12c platinum
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9.5gC
200000Þ$
P
9.5gC
200000Þ$
P
1,979.56
Monthly payment on
new mortgage.
:0+P +:0P
899.23
Net monthly payment (to
lender).
:$ :$
133190+?0 +133190³?0
-66,810.00
Net amount of cash
advanced (by lender).
11.5gC$ 11.5gC$$
-80,425.02
Present value of net
monthly payment.
:0- -:0³
-13,615.02
NPV to lender of net
cash advanced.
:0$¼ :0$¼
12§ §12³
14.83
% nominal yield (IRR).
15.25gC$ 15.25gC$$
-65,376.72
Present value of net
monthly payment at
15.25%.
:0- -:0³
1,433.28
NPV to borrower.
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?
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