A Shared Appreciation Mortgage is a unique home financing mechanism. This is not common, although some variations exist in loan modification situations. Here are the basics.
What is a Shared Appreciation Mortgage?
A Shared Appreciation Mortgage (SAM) is a type of home loan that gives a portion of the home’s appreciation to the mortgage lender in exchange for a below-market interest rate. The borrower benefits from a lower monthly payment and the lender receives a share of the profit, called contingent interest, when the house is sold.
SAMs can be structured in different ways. For example, the loan may gradually reduce the amount the lender receives in shared appreciation over time.
Although a SAM can help you afford a home thanks to the low rate, if your home’s value increases significantly, you could end up owing the lender more shared appreciation than you owe on the mortgage. .
Sample Shared Appreciation Mortgage
Margie buys a house for $330,000, sets aside $66,000, and finances the remaining $264,000 with a mortgage. She agrees to give 20% of the home’s appreciation to the lender when she sells the house in exchange for a lower rate that makes her monthly mortgage payment more affordable.
After 12 years, the value of Margie’s home has increased to $485,000. She decides to sell her house and uses the proceeds to pay the approximately $195,000 remaining on her mortgage and the 20% shared appreciation, $31,000, to her lender ($485,000 – $330,000 = $155,000 * 20%). That leaves him with $259,000, less closing costs, to invest in his next home.
Shared Appreciation for Shared Equity Mortgages
SAMs are similar to shared equity mortgages in that they both offer a more affordable route to home ownership. With a shared equity mortgage, a business invests in the home, such as paying the down payment or closing costs. This helps borrowers who may not have the upfront cash to make the purchase. The joint-stock company retains an interest in the house and recovers its capital on resale.
When to Use a Shared Appreciation Mortgage
SAMs are generally not offered by traditional mortgage lenders as a way to buy a home; rather, this option could be offered as part of a loan modification. A modification changes the terms of your loan so that payments are more affordable. It is generally reserved for borrowers in the event of permanent financial difficulties.
Some government and non-profit housing organizations also offer SAMs as part of affordable housing purchase programs. With these programs, you will receive a second mortgage with low or no interest and often without monthly payments. When it’s time to sell (or if you’re refinancing), you’ll pay off the entire mortgage, plus an agreed portion of the home’s appreciation.
At the end of the line
Shared Appreciation (SAM) mortgages are rare in the mortgage market today. This type of mortgage comes with a low interest rate in exchange for some of the appreciation of the home when it is sold. Some mortgage lenders may offer it as an option when setting up a loan modification, or it may be available through a homebuyer assistance program.