A mortgage loan on an income property has a remaining balance of $200,132.06. When the loan originated 8 years ago, it had a 20-year term with full amortization in level monthly payments at 6.75% comp. monthly. A lender has agreed to "wrap" a $300,000 second mortgage at 9.5% comp. monthly with full amortization in level monthly payments over 12 years. What is the effective yield to the lender on net cash advanced? Thanks for help.
"Wrap-Around Mortgage" is a term mostly used in US. It is essentially the same as re-finacing of mortgages, except for the fact that the re-financing is undertaken by a second lender who agrees to assume the payments and the term of the first mortgage, which remains in full force till maturity.
1) Find the monthly payment on the the first mortgage for the remaining 12 years @ 6.75%, which comes to :$2,031.55
2) Find the monthly payment of the second mortgage for the same 12 years agreed upon @ 9.50%, which comes to:$3,499.12
3) The difference between the second mortgage and the first mortgage is:$300,000 -$200,132.06
=$99,867.94 net amount to be lent.
4) The difference in the monthly payments of the two mortgages is:$3,499.12 - $2,031.55 =$1,467.57. This is the NET payment that the lender will receive on advancing an additional $99,867.94 in 3 above.
5) Finally, we find the effective yield to the lender on $99,867.94 with a NET monthly payment of $1,467.57 in 4 above over a 12-year period, which comes to:14.51%. And that is the END!.
