What a wrap is, and what subject-to means
In a wraparound, the seller's existing mortgage stays in place and a new, larger note is written around it. The buyer pays the seller on the new note; the seller keeps paying the original lender; the seller keeps the difference. Subject-to is the same idea with the financing stripped out — the buyer takes title subject to the existing loan and simply starts making its payments, with no new note wrapped around it.
The appeal in both cases is an old loan at a rate nobody can get today. A 4.5% mortgage written years ago is worth real money in an 8% market, and these structures are attempts to keep that rate alive through a sale rather than retire it. This page prices the arrangement from the seller's side: what you collect, what you still owe, and what the difference comes to over time.
Reading the example this page loads with
The defaults describe a wrap over a seasoned low-rate loan. These figures are illustrative — a teaching example, not market data for any particular city.
| Input | Value |
|---|
| Underlying balance · rate · remaining term | $220,000 · 4.5% · 25 yrs |
| Sale price · down payment | $300,000 · 10% |
| New note rate · term | 8.0% · 30 yrs |
| Horizon | 10 years |
The underlying loan costs $1,223 a month. The buyer puts $30,000 down and signs a $270,000 note at 8% over thirty years, which costs them $1,981. The seller collects the larger payment, forwards the smaller one, and keeps the difference: a monthly spread of $758.
Over ten years that spread accumulates to $91,000, and with the $30,000 down payment the seller has taken in $121,000 while the buyer occupies the property. The rate gap is doing all the work — the seller is earning 8% on money borrowed at 4.5%, on a balance they did not have to put up.
The equity position behind the spread
The monthly spread is the visible part; the balances are the rest. After ten years the underlying loan has amortized down to about $159,849, while the buyer still owes $236,857 on the wrap note — because it is larger, newer and at a higher rate, so it pays down more slowly.
The seller's position is therefore the difference, roughly $77,008, on top of the cash already collected. That gap widens over time, which is the structural reason a wrap favors the seller: two loans amortizing at different speeds pull apart, and the holder of the larger, slower one ends up ahead. It is also the number at risk if the arrangement unwinds badly, so it is worth knowing rather than discovering.
The due-on-sale clause, which is the real risk
Almost every mortgage contains a due-on-sale clause letting the lender demand the full balance if the property is transferred, and federal law makes those clauses enforceable. The Garn-St Germain Depository Institutions Act, codified at 12 U.S.C. § 1701j-3, preempted the state laws that had restricted them and provides that a lender may "enter into or enforce a contract containing a due-on-sale clause."
The statute does list transfers where a lender may not call the loan, and it is worth knowing what they are because they are routinely misdescribed. They cover transfers on death, to a spouse or children, under a divorce decree, into a trust where the borrower remains a beneficiary, a leasehold of three years or less with no purchase option, and subordinate liens that do not transfer occupancy. A sale to a buyer is not among them. Neither a wrap nor a subject-to purchase fits any exemption, so in both structures the lender is entitled to call the loan once it learns of the transfer.
Whether a given lender does so is a commercial judgement rather than a legal one, and loans have run for years untouched. But the exposure is real and it is not symmetrical: the balance becomes due immediately, the seller remains personally liable on the original note, and the buyer's payments do not protect either party if the lender accelerates. Insurance changes and tax records are among the ordinary ways a transfer comes to a servicer's attention.
Who is exposed to what
The seller stays on the original loan. Their credit carries it, their liability survives the sale, and a buyer who stops paying leaves them covering $1,223 a month on a property they no longer own — while pursuing a foreclosure to recover it. That is the cost of the $758 spread, and it should be priced as a credit risk rather than treated as free yield.
The buyer's exposure is the mirror image. They are paying a seller who has promised to forward the money, with no direct relationship to the lender and no way to confirm payments are being made unless the arrangement provides for it. A seller who pockets the payment while the underlying loan falls into default can cost the buyer the property. Servicing the arrangement through a licensed third party, so payments reach the lender directly and both sides can verify it, is the usual answer and is worth its cost.
Switching to interest-only
Set payment type to interest-only and the new note costs the buyer $1,800 a month instead of $1,981, cutting the spread to $577. The seller collects less monthly but the note balance never falls, so the full $270,000 remains outstanding and earning while the underlying loan keeps amortizing beneath it — the equity gap widens faster than under the amortizing version.
The structure to be careful about is a wrap note that amortizes more slowly than the loan underneath it over a long horizon, which can leave a seller owing on a note that is paying down ahead of the one they hold. On these inputs that does not arise, but changing the terms can create it, and the balance figures on this page are the place to check.
Before you structure one of these
This page models the arithmetic and nothing else. It does not model the balloon most wrap notes carry, title insurance treatment, who holds and pays the escrow, what happens if the underlying loan has an adjustable rate, or the tax reporting of interest you collect and pay. State law varies considerably, some states regulate these structures directly, and the disclosure obligations differ again where the buyer is an owner-occupant rather than an investor.
None of this is legal advice, and these are structures where the paperwork is the product — have a real estate attorney in the state where the property sits draft and review it before anything is signed. If the existing loan is being paid off rather than kept in place, the ordinary seller financing calculator is the right tool instead, and our article on cash versus financing covers the broader question of how a deal is funded.