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Best Shared Appreciation Mortgages | November 2022

Shared appreciation mortgages offer below-market interest rates in exchange for a share in the profit of your home when it is sold. This can help pay less in interest. Shared appreciation mortgages are very rare in the United States, but there are other alternatives if you are looking for home equity financing.

Shared appreciation mortgages (aka SAMs) are a type of mortgage that offers a lower interest rate if you agree to give your lender a share of any increase in the value of your home. They are a re-run of a home financing model that was first introduced in the 1980s. Mortgage rates were very high and SAMs provided a way to make homeownership more affordable. This model never really took off in the United States and they are still extremely rare.

Shared equity agreements, on the other hand, are a similar financing product that is becoming increasingly popular. Instead of selling a chunk of your home's appreciation for lower interest rates, shared equity agreements offer cash with no monthly payments or interest rates.

The list below shows our top picks for shared equity agreements.

What is a shared appreciation mortgage?

A shared appreciation mortgage, or SAM, is a mortgage where the lender offers below-market interest rate in exchange for a share of the profit when the house is sold or the term ends. Typically, SAMs have a deadline for paying off the principal of 10 to 30 years.

How do shared appreciation mortgages work?

Shared appreciation mortgages are similar to traditional mortgages. The difference is the homebuyer agrees to pay off the mortgage plus a percentage of the home’s appreciation value when the property is sold. In exchange for that stake in the appreciation, the lender offers a lower interest rate.

For example, if a borrower buys a home for $400,000 and then sell it years later for $600,000, the value of the home increased by $200,000. In a shared appreciation mortgage, the lender may take 30% to 50% of that amount, which in this example would be $60,000 to $100,000. The borrower keeps the rest.

Remember that if you're not selling your home when the SAM's term ends, you'll need to come up with the cash, whether from savings or a home equity loan. In some cases, it can be a challenge to come up with the money required to pay off a SAM without selling the property.

When is a Shared Appreciation Mortgage a Good Idea?

A shared appreciation mortgage can make it more affordable to purchase a home. It can also help buyers to qualify for the purchase of higher-cost properties than they would otherwise qualify for.

If you're self-employed, or have irregular income and struggle to qualify for a traditional equity product, then a SAM could be an attractive option. Your home acts as collateral for the mortgage and doesn't require monthly payments, so lenders are not as concerned about your income and ability to repay the loan.

In some cases, lenders offer shared appreciation arrangements as a type of loan modification when homeowners are struggling to make payments. For example, a lender may lower the mortgage balance in exchange for 25% of the property’s appreciation value upon resale. If the borrower stayed current on payments for a set period the reduced balance is usually forgiven.

Are shared appreciation mortgages a good deal?

It depends on the housing market and terms you can get. If home prices are rising long-term and interest rates are affordable, it is usually not a good deal for borrowers to get into a shared appreciation mortgage because the increase in value can be more exceed the savings in interest. Plus, if the principal loan is fixed, the homeowner still owes the mortgage's principal when the house value drops.

However, shared appreciation mortgages can have very favorable terms when they are issued by nonprofits and governments. For example, some are structured as second mortgages and do not require any payments from the borrower until the property is sold or refinanced. After the sale or refi, the borrower must repay the full loan amount and a share of the home-price increase.

What are the pros and cons of a Shared Appreciation mortgage?

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and the drawbacks of shared appreciation mortgages.

Pros
  • Lower interest rates.
  • Allows you to buy a more expensive home.
  • Easier to qualify for.
Cons
  • Higher costs.
  • Smaller loan amounts.
  • Reduces your profit when you sell your house if its value increases.
  • You may have to sell the house to repay the mortgage.
  • Potential tax issues.

Shared appreciation mortgages can provide a convenient way to buy a home with lower interest rates and more favorable terms. They can also help you buy a more expensive home than you would usually afford. Typically, it is also easier to qualify for a SAM than a traditional home equity financing product.

However, they usually entail higher costs and have offer smaller loan amounts. There are substantial costs associated with SAMs. Lenders will usually charge between 2% and 5% in origination fees and will also receive a share of your home’s future appreciation. In many cases, this is higher than what you would have paid for most home equity products. If home prices drop, you still owe the principal balance of the loan, whether your home is worth that much or not.

There are also potential tax issues to consider with a SAM. In some scenarios, you could end up paying capital gains taxes on funds paid to the lender.

To illustrate, if your home's appraised value is $500,000 and you agree to pay the lender 10% of the equity appreciation: If you were then able to sell your home for $800,000, you could be liable for taxes on the $20,000 (10% of $200,000) you owe the lender. If you are considering a SAM, consult with a tax professional to check the potential tax ramifications

What next?

Shared appreciation mortgages are not widely available in the United States now. However, shared equity agreements are. A shared equity agreement can provide you with cash while requiring no monthly payments or interest. If you are considering a mortgage refinance, a shared appreciation mortgage, or a HELOC, find out what terms you can get with a shared equity agreement before you make up your mind. The list of shared equity agreements above is a great place to start.

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