| Wrap payment (P&I) | — |
| Underlying payment | — |
| Rate spread (wrap − underlying) | — |
| Equity spread at closing (wrap − underlying balance) | — |
| Cash at closing (down payment) | — |
| Wrap balance at payoff | — |
| Underlying balance at payoff | — |
| Net payoff check at payoff | — |
| Total profit over the deal | — |
Worked Example
Say you took over a property subject-to with a $140,000 underlying loan at 4.5% and 300 months remaining, then resold it for $200,000 with $15,000 down. You carry a wrap note of $185,000 ($200,000 − $15,000) at 8.5%, amortized over 360 months with a balloon at month 84.
- Underlying payment. Monthly rate i = 4.5% ÷ 12 = 0.375%. Payment = $140,000 × 0.00375 ÷ (1 − 1.00375−300) = $778.17. (If the loan's actual payment differs — it usually amortizes on the original balance and term — type the real payment into the override box.)
- Wrap payment. Monthly rate i = 8.5% ÷ 12 ≈ 0.7083%. Payment = $185,000 × 0.0070833 ÷ (1 − 1.0070833−360) = $1,422.49.
- Monthly spread. $1,422.49 − $778.17 = $644.32 per month, or about $7,731.89 per year.
- Rate spread. 8.5% − 4.5% = 4.00% — you earn 8.5% on the $45,000 of equity you carry and pocket a 4-point arbitrage on the $140,000 you owe underneath.
- Closing economics. Equity spread at closing = $185,000 − $140,000 = $45,000. Cash at closing = the $15,000 down payment.
- Balloon at month 84. The wrap balance amortizes to $172,196.24 while the underlying balance amortizes to $115,057.99. The buyer pays you $172,196.24; you pay off $115,057.99; your net payoff check is $57,138.25.
- Total profit. $15,000 down + ($644.32 × 84 = $54,123.26) + $57,138.25 net payoff = $126,261.51.
- Effective yield. You received $15,000 at closing rather than investing cash, so your net investment is negative. The yield on cash invested is infinite (no net cash invested) — every dollar of the $126,261.51 profit is earned with none of your own money at risk in the structure (the property and the due-on-sale risk are another matter).
Note the cross-over dynamic: at month 84 the underlying loan still has 216 payments left, so the underlying payoff comes out of your balloon proceeds. The calculator nets that out for you.
How the Math Works
What a wrap is, in plain English. In a wraparound mortgage, the existing loan (the underlying loan) stays in place and keeps amortizing on its own schedule. The seller creates a new, larger note — the wrap — that "wraps around" the underlying balance. The buyer pays the seller on the wrap; the seller keeps paying the underlying lender. "Subject-to" is the acquisition side of the same idea: the buyer takes title to the property while the seller's mortgage stays in the seller's name, unmodified. UPB means unpaid principal balance — the amount still owed on a loan.
Payments. Both notes use standard monthly amortization. With monthly rate i = annual rate ÷ 12 and term n months: P = UPB × i ÷ (1 − (1 + i)^−n). When i = 0, the payment is simply UPB ÷ n. Important: a seasoned underlying loan's real payment was set from its original balance and term, not today's balance and remaining term — the auto-computed figure is usually within a few cents, but use the override field with the number from the mortgage statement when you have it.
The spread. Monthly spread = wrap payment − underlying payment. Rate spread = wrap rate − underlying rate. The seller earns the full wrap rate on the equity portion (wrap balance − underlying balance) plus the rate spread on the entire underlying balance — which is why wrap yields routinely exceed the stated wrap rate.
Balances and the payoff netting. The balance of either note after k payments is B(k) = UPB × (1 + i)^k − PMT × ((1 + i)^k − 1) ÷ i. At the wrap's end (the balloon month if set, otherwise the full wrap term), the buyer pays the remaining wrap balance and the seller simultaneously pays off whatever remains on the underlying loan. The seller's net payoff check = wrap balance − underlying balance at that month. Because the two notes amortize at different speeds, this calculator runs both balances to the payoff month rather than assuming the closing-day equity spread holds.
Effective yield on cash invested. We build the actual cash-flow vector: at month 0, the down payment received (cash in); each month, wrap payment in, underlying payment out; at the payoff month, the net payoff check. We then solve for the monthly internal rate of return using Newton–Raphson with a bisection fallback (bounded between −99% and 1,000% annual, converged to 1×10−9 monthly) and report the annualized nominal yield (monthly rate × 12). If the down payment you received meets or exceeds any cash you put in, your net investment is zero or negative — there is no rate that prices "free money," so the calculator reports the yield as infinite (no net cash invested) and shows total dollar profit instead.
Amortization cross-over. If the underlying term outlasts the wrap balloon (the common case), part of your balloon proceeds goes to retire the underlying balance — the calculator warns you and shows both balances. If instead the wrap runs longer than the underlying loan, the underlying pays off mid-stream and your monthly cash flow jumps to the full wrap payment from that month forward; the model accounts for that too.
Due-on-sale clause risk. Nearly all post-1982 conventional mortgages contain a due-on-sale clause: transferring the property without the lender's consent gives the lender the right to demand immediate payoff of the full balance. A subject-to transfer or wrap sale typically triggers that right. Lenders do not always exercise it — especially while payments arrive on time — but they can, and if the loan is called you must pay it off or refinance on short notice. This is a legal risk this calculator does not price. Consult a real estate attorney before structuring a subject-to or wrap transaction.
Assumptions and limitations. Principal-and-interest only — no taxes, insurance, servicing fees, or escrow. Payments are assumed on time with no defaults or prepayments before the balloon. Display values are rounded; all intermediate math is carried at full precision. Educational use only.
Frequently Asked Questions
How does a wraparound mortgage work?
In a wraparound mortgage, the seller keeps the existing (underlying) loan in place and creates a new, larger note that "wraps around" it. The buyer makes one payment to the seller on the wrap note; the seller keeps making payments on the underlying loan and pockets the difference. The seller earns the spread between the wrap payment collected and the underlying payment owed, plus any equity spread between the wrap balance and the underlying balance when the wrap pays off.
How do you calculate wrap mortgage spread?
Compute each payment with the standard amortization formula P = UPB × i ÷ (1 − (1 + i)^−n), where i is the monthly rate (annual ÷ 12) and n is the term in months. Monthly spread = wrap payment − underlying payment. For example, a $185,000 wrap at 8.5% for 360 months pays $1,422.49 per month, while a $140,000 underlying loan at 4.5% with 300 months remaining costs $778.17 — a monthly spread of $644.32, or about $7,732 per year.
What is subject-to in real estate?
Buying a property "subject-to" means the buyer takes title to the property while the seller's existing mortgage stays in place and in the seller's name. The buyer agrees to make the payments but does not formally assume the loan, so the lender's loan terms are unchanged. Investors often combine subject-to acquisitions with a wraparound resale: they take over a low-rate loan, then resell with seller financing at a higher rate and earn the spread.
What is the due-on-sale clause risk in subject-to deals?
Most modern mortgages contain a due-on-sale clause that lets the lender demand full payoff of the loan when the property is transferred without the lender's consent. A subject-to transfer or wrap sale typically triggers that clause, meaning the lender has the legal right (though not the obligation) to call the loan due. If called, the loan balance must be paid or refinanced quickly. The risk is real and the consequences are significant, so anyone structuring a subject-to or wrap deal should consult a real estate attorney first.
How do you calculate the yield on a wrap mortgage?
Model the net monthly cash flows: wrap payment in, underlying payment out, and at the wrap's end or balloon month, the wrap balance received minus the underlying balance paid off. Solve for the monthly internal rate of return (IRR) that makes the present value of those flows equal the net cash invested, then multiply by 12 for the annualized nominal yield. If the down payment received exceeds any cash put in, net investment is zero or negative and the yield is effectively infinite — report the total dollar profit instead.
What happens at the balloon on a wraparound mortgage?
At the balloon month, the wrap buyer refinances or sells and pays the seller the remaining wrap balance in one lump sum. The seller must simultaneously pay off whatever still remains on the underlying loan. The seller's net check at the balloon equals the wrap balance minus the underlying balance at that month. Because the two notes amortize at different rates and terms, run both balances to the balloon month to see the actual net payoff.