What Is a Shared Appreciation Mortgage?

How does a shared appreciation mortgage work?

SAMs are typically structured so that when the home is sold or refinanced, a predetermined percentage of the appreciation is paid to the lender. This percentage is agreed upon at the time the mortgage is originated.

As an example, let’s say you financed $350,000 with a lender who provided a 25% shared appreciation mortgage. Five years later, you sell the house. If the home’s value appreciated from $350,000 to $450,000, the lender would receive $25,000 (25% of the home’s $100,000 gain).

The percentage of appreciation that the lender requires can vary depending on the borrower’s credit history, the property, the state of the market, and other terms of the loan. In many cases, the higher the lender’s risk, the higher the percentage of appreciation, which may range from 20% to 50%.

The shared appreciation aspect helps lenders mitigate their risk and provides borrowers with an opportunity to manage their cash flow more effectively.

Shared appreciation mortgage variations

Shared appreciation mortgages can be customized to suit different financial needs and situations. One variation includes a phased-out clause, which may reduce the percentage paid to the lender over time or even remove it entirely after a predetermined number of years.

As an example, let’s say you entered into a 25% shared appreciation mortgage with a 5-year phase-out clause. At the end of the five years, you may no longer need to share any appreciation, or the shared percentage might drop from 25% to 15%.

Phase-out clauses are often included to encourage the borrower to stay in the home and continue to pay back the mortgage loan. This continued relationship is favorable to the lender because they make money from ongoing interest payments.

What if the home goes down in value?

If the home’s value decreases, the borrower is generally not required to share any losses with the lender. The primary obligation remains to repay the initial loan amount and any agreed-upon interest. The shared appreciation clause only activates if the home’s value increases.

However, it’s important to review the terms of your SAM agreement carefully, as some variations might include specific clauses addressing market downturns.

How do you get a shared appreciation mortgage?

Shared appreciation mortgages are not widely available, making them a less common option for most homebuyers and homeowners. However, there are specific situations where you might encounter SAMs. Here are the scenarios where SAMs are most likely to be applied:

Underwater or distressed borrowers

In cases where borrowers owe more on their mortgage than their home is worth, lenders may offer a SAM as part of a loan modification. This arrangement can help distressed homeowners lower their monthly payments and avoid foreclosure. By sharing future appreciation, lenders can recover some of their losses if the home’s value increases over time.

Government housing assistance programs

Some government housing assistance programs offer SAMs as a way to help low-income families or first-time homebuyers achieve homeownership. These programs are designed to make homeownership more affordable by reducing initial costs and monthly payments, with the understanding that the borrower will share future appreciation with the program.

Here are links to some government-sponsored shared appreciation mortgage programs:

• San Francisco (CA) Downpayment Assistance Loan Program (DALP)
• Arlington (VA) Moderate-Income Purchase Assistance Program (MIPAP)
• Boulder (CO) House to Homeownership Down Payment Assistance Loan Program

Real estate investors and house flippers

Real estate investors and house flippers may also encounter SAMs as a financing option. These professionals often look for creative financing solutions to maximize their investment returns. By entering into a SAM agreement, they can potentially secure more favorable loan terms and manage cash flow more effectively while sharing a portion of the appreciation with the lender once the property is sold.

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Benefits of a shared appreciation mortgage

If you’re able to find a lender who agrees to enter into a shared appreciation mortgage agreement, there are a number of benefits that can make homeownership more accessible and financially manageable. Here are some of the key advantages:

• A lower interest rate is the most common benefit of a SAM.
• Lower monthly mortgage payments can ease the financial burden for borrowers.
• Easier qualification for first-time or low-income homebuyers or those with less-than-perfect credit.
• Potential for future gains for renters who would normally see no gains from their monthly rental payments to a landlord.

Drawbacks of a shared appreciation mortgage

While SAMs offer several benefits, there are also some significant drawbacks to consider:

• You must share a portion of your home’s future appreciation with the lender.
• SAMs are not widely available which means finding a lender or program offering this type of mortgage can be challenging.
• Loan terms may be complex, with variations such as phased-out clauses and different appreciation-sharing percentages.
• There’s a potential for higher costs in the long run that might outweigh the benefits over time, especially if your home significantly increases in value.

Shared appreciation mortgage vs. home equity investment

It might be easy to confuse a shared appreciation mortgage (SAM) with a home equity investment (HEI). Both involve sharing some aspect of your property’s value with another party, but they function differently.

An HEI is a financial arrangement where, instead of borrowing against your home’s equity, you partner with an investment company. In this arrangement, the company gives you a lump sum of cash in return for a percentage of your home’s future value. This differs significantly from traditional home equity loans or home equity lines of credit (HELOCs), where you borrow money and repay it with interest.

The biggest difference is that an HEI is not a loan. There are no monthly payments or interest charges. Instead, when you sell your home—or at the end of the agreed term (usually 10 to 30 years)—the company takes its share of the home’s appreciated value along with the initial investment. In cases where the property’s value depreciates, the investment company also shares in the financial loss.

An HEI can be particularly advantageous if you need immediate cash but are unable to handle additional monthly payments. This option is especially appealing to homeowners who have substantial equity in their properties but may find it challenging to obtain traditional loans. An HEI can allow you to access the value of your home without the pressure of regular payments. But as with a SAM, in exchange for these benefits, you are giving up potential profits to a third party.

If you can’t get a shared appreciation mortgage

Finding a shared appreciation mortgage (SAM) can be challenging, as they are not widely available in the current market. However, there are other strategies to help you obtain a lower interest rate or down payment assistance:

• Apply for a down payment assistance program: Many local and state programs offer financial assistance to help with down payments and closing costs. These programs are often geared toward first-time homebuyers or those with low to moderate incomes.
• Take steps to improve your credit scores: A higher credit score can qualify you for better mortgage rates and terms. Focus on paying down debt, making timely payments, and correcting any errors on your credit report to boost your score.
• Shop around and compare rates and lenders: Different lenders offer varying rates and terms. Comparing multiple offers can help you find the most favorable mortgage for your situation.
• Pay for discount points: Purchasing discount points can lower your mortgage interest rate. Each point typically costs 1% of the loan amount and can reduce the interest rate by about 0.25%, leading to significant savings over the life of the loan.

Plan ahead with a top agent

Consulting with a top-rated local real estate agent can make a significant difference in your homebuying journey. A knowledgeable agent can help you explore local, regional, and federal financing options you may not be aware of, including down payment assistance programs and strategies to improve your mortgage terms.

Even if you’re just curious or planning way ahead, HomeLight can connect you to the most trusted, knowledgeable agents in your market. We analyze over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs.

Whether it’s a baby step or a giant leap, reach out to a top agent today to explore making your dream of homeownership a reality.

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