Wraparound mortgage calculator: payment, spread & balloon

What this measures

In a wrap, the buyer signs a note to the seller for the sale price minus the down payment. That note wraps around the seller's existing loan, which stays in place. Each month the buyer pays the seller, and the seller pays the lender. The seller keeps the spread.

The spread comes from two places. The wrap note is usually larger than the old loan, because it includes the seller's equity. And the wrap rate is often higher than the old loan's rate. When the seller's old rate is low, a small part of the seller's money earns the wrap rate on the whole note, which is why the yield on the seller's equity can run well above the wrap rate.

Most mortgages have a due-on-sale clause. A sale on a wrap can let the lender call the whole underlying loan due. If that happens, the seller has to pay it off or refinance, whatever the buyer is paying. Federal and state rules, including the loan originator and SAFE Act licensing rules, can also apply to owner financing. Have a real estate attorney draft the deal and use a licensed servicer or escrow company to collect and pay.

Formula

Wrap note = sale price − buyer down payment. Buyer payment = wrap note × r ÷ (1 − (1 + r)^−n), with r the wrap rate ÷ 12 and n the wrap amortization in months. Underlying payment uses the same formula on the underlying balance, rate, and months left, unless you type it.

Monthly spread = buyer payment − underlying payment. Equity in the note = wrap note − underlying balance. Net at payoff = wrap balance at the balloon − underlying balance then. Total seller cash = down payment + every monthly spread + net at payoff. Yield on equity is the annual rate that makes those cash flows worth the equity in the note today.

Example

Example

The sample sale, 7% wrap with a 5-year balloon, and a $150,000 underlying loan at 3% with 25 years left are a check of that math. Buyer's monthly payment is $1,796.32. Underlying payment is $711.32. Seller's monthly spread is $1,085.00.

Illustrative example. The price, loans, and terms are sample inputs so the math is visible. They are not a property, a buyer, or a note RE Underwrite Lab wrote. The full walk-through with the same numbers is in the wraparound mortgage example guide.

Example

Second example

Illustrative example. A $200,000 sale with $20,000 down makes a $180,000 wrap note. The seller still owes $100,000, so $80,000 of the note is the seller's own equity. In month one at a 6% wrap rate, the buyer pays $900 of interest (180,000 × 0.06 ÷ 12). At a 3% underlying rate, the seller pays $250 of interest (100,000 × 0.03 ÷ 12). The seller keeps $650 of interest spread that month. These figures are made up. They are not the sample in the form above.

When this ratio misleads

A healthy spread can hide a seller who still owes the underlying loan when the buyer's balloon comes due. If the buyer cannot refinance or sell, the seller still owes the lender. And if the lender calls the loan under its due-on-sale clause, the spread stops mattering at once.

Common pitfalls

Comparing only the rates. The seller's spread depends on both rates and both balances, and it changes as the two loans amortize at different speeds.

Letting the buyer pay the lender directly, or skipping a servicer. If a payment is missed, the seller's credit and the underlying loan are on the line. A licensed servicer or escrow company keeps a record of every payment in and out.

Forgetting the underlying loan's taxes and insurance escrow. This page is principal and interest only, so check who pays escrow and how.

Questions