Shared appreciation mortgage

What is a shared appreciation mortgage?

A shared appreciation mortgage, or SAM, is a home loan in which the lender offers a below-market interest rate in exchange for a share of the profit when the house is sold. A SAM usually has a deadline for paying off the principal, for example, 10 years.

Deeper definition

The housing market determines whether a shared appreciation mortgage is a good deal. In a market where home prices are rising long-term, it’s usually not a good deal for the borrower because she will still owe the outstanding principal balance if the property’s value decreases.

On the other hand, the share of appreciated value, referred to as contingent interest, will be zero if the borrower sells the property at a loss.

Shared appreciation loans also are used by nonprofits and governments. They are structured as second mortgages, but borrowers make no payments until they sell the property or refinance the first mortgage. After the sale or refi, the borrower must repay the full loan amount, plus a portion of the home-price increase.

Shared appreciation mortgage example

Margie buys a house for $150,000, paying down $30,000 and taking out a mortgage for $120,000. In exchange for an interest rate that is lower than the market average, Margie agrees to give the lender 20 percent of the increase in value when she sells. The lower interest rate of her shared appreciation mortgage makes her monthly payment more affordable.

By the time Margie is ready to sell her house, the property value has doubled, to $300,000. She must pay off a principal balance of $100,000, plus another $30,000 to the lender for its share of the appreciated value: .20 x $150,000 = $30,000.

This leaves Margie $170,000 to buy another home.

Use Bankrate’s calculator to figure out how much house you can afford to buy.