How Do You Calculate the Yield on a Wrap Around Mortgage?

A wrap around mortgage provides additional funding to a borrower when traditional mortgage lenders will not issue a large enough loan. Basically, the wrap around mortgage pays the difference between the home's price and the loan amount. The wrap around lender collects payment for the entire loan amount, pays the principle lender and keeps the difference. Wrap around mortgages have a higher yield than traditional mortgages because the interest is calculated on the entire loan sum but the wrap around lender extends only a small amount of financing.

For example, on an existing $100,000 loan with a $50,000 wrap around, a borrower could purchase a $250,000 house, and the wrap around lender could charge interest on the $150,000 of debt even though it extended only $50,000, making the yield on the loan very high.