Key takeaways

  • A shared appreciation mortgage is a type of home loan in which you exchange a portion (share) of your home's appreciation for a lower interest rate.
  • This type of loan isn't readily available. It might be an option if you need to modify your existing mortgage.
  • Rather than look for a shared appreciation loan, you can lower your interest rate in other ways, including with a higher credit score and down payment.

A shared appreciation mortgage is a unique home financing arrangement. It isn’t a common option today, although some variations of it still exist in certain loan modification situations. Here’s what to know.

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. You, as the borrower, benefit from a lower monthly payment, and the lender receives a share of the profit, known as contingent interest, when the home is sold.

A SAM 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 lower rate, if your home’s value increases significantly, you might wind up owing the lender more in shared appreciation than you owe on the mortgage.

How do shared appreciation mortgages work?

Some SAM options keep the lender’s share of appreciation in place for the life of the loan. That means that no matter when you sell, you’ll owe the lender that cut. With other types of SAMs, that shared appreciation expires after a set period of time, such as five years.

You might also come across a shared appreciation loan that phases out the appreciation share over time. In this scenario, the percentage you owe the lender upon selling the home decreases periodically until it’s completely phased out.

Say you bought a home for $330,000 with a shared appreciation loan that gives the lender a 20% share. A decade later, you sell the home for $485,000. At that point, you’d owe your lender $31,000, or its appreciation share:

$485,000 – $330,000 = $155,000

$155,000 * 20% = $31,000

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 its equity at resale.

When to use a shared appreciation mortgage

Most mortgage lenders don’t offer shared appreciation mortgages to buoy a home. More often, a SAM comes into play when a borrower struggling to pay their mortgage seeks a loan modification. A modification permanently changes the terms of your loan so that the payments are more affordable.

That said, you might find the rare lender offering a shared appreciation loan in this cases:

  • You’re exploring affordable homebuying programs that include shared appreciation.
  • You plan to stay in the home past the phase-out point of the shared appreciation clause.
  • You’re flipping houses or otherwise investing in real estate and need a lower rate.

Alternatives to a shared appreciation mortgage

It’s tough to find a shared appreciation mortgage, and there are better ways to obtain a lower interest rate. You might try:

Bottom line on shared appreciation mortgages

While a shared appreciation mortgage comes with a lower interest rate, this type of loan is extremely hard to find — very few lenders offer them today. Rather than giving up a portion of your home’s appreciation to your lender when you sell, explore these other types of home loans.