Question

Suppose you want to purchase a property for $300,000 and you have $25,000 to put down as a down payment. The property has an existing mortgage that can be wrapped. This loan is a fixedrate mortgage at 6 percent, monthly payments. This loan had an original balance of $230,000 and has 20 years remaining on its original 30-year term. The current market rate for a new fixed-rate loan is 8.50 percent for 20 years. The seller will give you a 20-year wrap loan for an amount equal to the purchase price minus the down payment at 7.25 percent, monthly payments. What is the effective equity yield for the wrap lender if the wrap loan is written for a term equal to the remaining term of the existing mortgage and both are held to maturity?

Answer 1

The effective equity yield for the wrap lender is calculated by comparing the interest earned from the wrap loan to the interest paid on the existing mortgage, considering the time value of money over the remaining 20-year term of both loans.

Step-by-step explanation:

The student asked about calculating the effective equity yield for a wrap lender involved in a property transaction. The scenario involves purchasing a property for $300,000 with a $25,000 down payment and wrapping an existing mortgage with a 6 percent fixed-rate, which has 20 years remaining from its original 30-year term. Additionally, the seller is providing a wrap loan at 7.25 percent for the remaining balance, which is also for 20 years. To determine the effective equity yield for the wrap lender, one would calculate the difference between the interest earned on the wrap loan and the interest paid on the existing mortgage, taking into account the time value of money over the 20-year period of both loans.