A shared appreciation mortgage is a unique home financing arrangement. It isn’t common, although some variations of it 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 grants 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, known as contingent interest, when the home is sold.
SAMs can be structured in various ways. For example, the loan might phase out how much the lender receives in shared appreciation over time.
While a SAM can help you afford a home thanks to the low rate, if your home’s value increases significantly, you might wind up owing the lender more in shared appreciation than what you owe on the mortgage.
Shared appreciation mortgage example
Margie buys a home for $330,000, putting down $66,000 and financing the remaining $264,000 with a mortgage. She agrees to hand over 20 percent of the home’s appreciation to the lender when she sells the home in exchange for a lower rate that makes her monthly mortgage payment more affordable.
After 12 years, Margie’s home value has increased to $485,000. She decides to sell her home and uses the proceeds to pay the roughly $195,000 remaining on her mortgage and the 20 percent shared appreciation, $31,000, to her lender ($485,000 – $330,000 = $155,000 * 20%). This leaves her with $259,000, less closing costs, to put toward her next home.
Shared appreciation vs. shared equity mortgages
SAMs are similar to shared equity mortgages in that they both offer a more affordable route to homeownership. With a shared equity mortgage, a company invests in the home, such as by putting up the down payment or closing costs. This helps borrowers who might not have the upfront cash to make the purchase. The shared equity company retains a stake in the home, and recoups their equity at resale.
When to use a shared appreciation mortgage
SAMs are not typically offered by mainstream mortgage lenders as a means to purchase a home; rather, this option might be offered as part of a loan modification. A modification changes the terms of your loan so that the payments are more affordable. It’s usually reserved for borrowers in cases of permanent financial hardship.
Some government and nonprofit housing organizations also offer SAMs as part of affordable homebuying programs. With these programs, you’ll receive a second mortgage with low or no interest rate and often no monthly payments. When it comes time to sell (or if you refinance), you’ll repay the mortgage in full, as well as an agreed-upon portion of the home’s appreciation.
Shared appreciation mortgages (SAMs) are uncommon in the mortgage market today. This type of mortgage comes with a low interest rate in exchange for a portion of the home’s appreciation when it’s sold. Some mortgage lenders might offer it as an option when setting up a loan modification, or it might be available through a homebuying assistance program.