What is a Shared Appreciation Mortgage?

Jim B.

A shared appreciation agreement is an alternative type of mortgage agreement in which the mortgage lender offers the home buyer relatively low interest payments on the loan. In return, the buyer must share some of the appreciation in the value of the home with the lender when the home is sold or when the term of the mortgage ends. This allows the buyer an opportunity to save significantly on interest payments over the course of a lengthy mortgage. The lender assumes more of the risk for the shared appreciation mortgage, or SAM, but can profit if the property appreciates a great deal.

During a shared appreciation mortgage agreement, a mortgage lender may offer low interest payments to a homeowner in exchange for a share of the appreciation in the value of a home.
During a shared appreciation mortgage agreement, a mortgage lender may offer low interest payments to a homeowner in exchange for a share of the appreciation in the value of a home.

Most people who attempt to buy a home lack the capital necessary to pay for the home without some help. That help often takes the form of a mortgage loan, in which the buyer comes up with a small down payment and is then fronted the rest of the money for the home from a mortgage company. The borrower then must pay back the loan via regular installments and also owes interest to the lender. A buyer wishing to avoid costly interest payments may wish to attempt a shared appreciation mortgage.

With a traditional mortgage, the mortgage company makes money through the interest on the loan, which can add up to thousands of dollars over the life of a mortgage. When a buyer takes out a shared appreciation mortgage, the lender is sacrificing some by lowering the interest payments. These interest payments are usually set at a low fixed rate for the SAM.

The lender can then make the money back, and perhaps even more, depending on how much value the home gains over the life of the loan. For that reason, a shared appreciation mortgage becomes a type of investment opportunity for the lender. In a normal mortgage, this would not be the case, because the home buyer with a normal mortgage can claim all of the appreciation value when the house is sold. With an SAM, the lender gets a percentage of the appreciation at the end of the agreement.

Borrowers must realize that they owe this appreciation amount to the lender when they take on a shared appreciation mortgage. If the house isn't sold, this means that the owner of the home will have to come up with the cash to pay back the lender at the end of the mortgage term, an amount that can be thousands of dollars. The best way for the buyer to prevent against this problem would be to invest the interest savings accrued throughout the life of the mortgage. This can offset the amount owed to the lender and leave the home owner with plenty left over.

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