Shared Appreciation Mortgage: All You Need to Know

Key Takeaways

• A shared appreciation mortgage is a type of mortgage in which a borrower agrees to share the future gains on the home’s value with the lender in exchange for a reduced interest rate.
• SAMs may be more common in real estate investment and house flipping.
• Prospective borrowers should consult with real estate and tax professionals before finalizing a SAM.
• The key difference between a SAM and a home equity agreement is that the latter does not require monthly debt payments.

Most homebuyers rely on traditional mortgage loans to purchase real estate. But buyers willing to give up some of their future equity, may have other options to consider. A shared appreciation mortgage (SAM) allows buyers to leverage their home’s future value for more affordable financing.

This article provides key information on how SAMs work, their risks and rewards, and how they compare to a home equity agreement.

What is a Shared Appreciation Mortgage (SAM)?

A shared appreciation mortgage (SAM) is a unique type of loan product for purchasing real estate. With a traditional mortgage, a lender advances a lump sum of money to a borrower to help finance the purchase of a home. The borrower, in return, agrees to repay the borrowed amount through monthly payments of principal and interest over a fixed term.

The same elements of a traditional mortgage apply to a shared appreciation mortgage a except for one additional feature. In a SAM, the borrower agrees to share a percentage of the gain on the house when it’s sold (i.e., its appreciation) with the lender. The shared percentage of appreciation (sometimes referred to as a contingent interest) varies, depending on the mortgage and the parties involved. A lender may require anywhere from 30% to 50% of the appreciation.

For example, let’s say a borrower purchased a home for $300,000 with a SAM and a contingent interest of 50%. If the borrower sold the home for $400,000, they would pay the lender $50,000 – or 50% of the increased value.

Why would a borrower agree to share their home’s appreciation with a lender?

In exchange for giving up a share of their appreciation, a borrower will receive a lower interest rate than what that may otherwise qualify for through a traditional mortgage.

Generally, lenders determine the mortgage rates that are available to borrowers based on several factors, including:

• Loan-to-value ratio (dependent on how big of a down payment the borrower provides)
• Credit score
• Overall economy and market conditions

For borrowers who may have a weaker credit score or lack the money for a larger down payment, a SAM may be an option to obtain a more manageable mortgage payment.

SAMs can have other contingencies and variations that may also alter the overall appeal of the loan to a borrower. In some cases, the obligation to share the home’s appreciation with the lender remains in place until you sell the home. In other SAMs, the requirement to share appreciation with the lender may expire after a certain time frame or may be phased out over the life of the loan. A phase-out clause works by reducing (or eliminating) the amount of interest owed to the lender over time, as the borrower does not sell the home and makes timely mortgage payments. The idea behind the phase-out clause is that the lender recoups money through the additional payments of interest and principal. This allows the lender to forgo its share of the appreciation after a sale.

Possible Scenarios for Using a Shared Appreciation Mortgage

Shared appreciation mortgages are not common in standard residential real estate deals because of the variety of mortgage options available to homeowners. Some government-backed down-payment assistance programs use SAMs. SAMs may also be more popular in the case of house flipping or other investment situations. House flippers can benefit from the lowered interest rate, which can lower carry costs while remodeling the home for resale.

Lenders may also be willing to offer a SAM to homeowners who are underwater on their current mortgage (where the current market value is less than the amount owed on the mortgage). This may allow the lender to modify the terms of the loan to alleviate the short-term financial burden to the borrower in exchange for a future interest on the appreciation.

Further Understanding the Benefits and Risks of a SAM

As with any financial transaction, the benefits of a SAM for a prospective borrower will likely depend on personal finances and terms of the specific SAM.

A borrower’s primary benefit with a SAM is the lowered interest rate, which can decrease the mortgage payment. A decreased mortgage payment can greatly help a family that wants to free up cash for other financial needs, such as repaying debts, building retirement savings or paying education expenses.

Possible Scenarios for Using a Shared Appreciation Mortgage

Shared appreciation mortgages are less common in for standard residential real estate deals because of the variety of mortgage options available to homeowners. Rather, SAMs may be more popular in the case of house flipping or other investment situations. House flippers can benefit from the lowered interest rate, which can lower carry costs while remodeling the home for resale.

Lenders may also be willing to offer a SAM to homeowners who are underwater on their current mortgage (where the current market value is less than the amount owed on the mortgage). This may allow the lender to modify the terms of the loan to alleviate the short-term financial burden to the borrower in exchange for a future interest on the appreciation.

Further Understanding the Benefits and Risks of a SAM

As with any financial transaction, the benefits of a SAM for a prospective borrower will likely depend on personal finances and terms of the specific SAM.

A borrower’s primary benefit with a SAM is the lowered interest rate, which can decrease the mortgage payment. A decreased mortgage payment can greatly help a family that wants to free up cash for other financial needs, such as repaying debts, building retirement savings or paying education expenses.

The potential downside to a SAM borrower is the decrease in the gains that comes from sharing the appreciation with the lender. Furthermore, the overall value of that appreciation can be difficult to estimate when agreeing to the SAM because of the unpredictable nature of real estate markets. In more stagnant markets, the upside of a SAM to a borrower may be high. But a homeowner in a booming real estate market could find themselves sharing appreciation that is far more valuable than the cost savings from the lowered mortgage rate.

Consult a Professional Before Finalizing a SAM

The terms (and consequences) of SAMs can be difficult to fully comprehend without the help of an experienced professional such as a lawyer, CPA, mortgage broker or real estate agent. Determining the actual benefit of a SAM may require a detailed understanding of a borrower’s total finances and future plans (e.g., how long they plan to own the home). Working with a professional on a SAM transaction can help a prospective borrower make a better-informed decision about how the loan may impact their taxes and other finances.

Comparing a SAM to a Home Equity Agreement (HEA)

Borrowers may easily confuse a SAM with a home equity agreement (HEA), which is what Unlock offers. The two are similar in that the homeowner shares an interest in the home with another party, but they greatly differ in other ways.

One key difference is that with an HEA, a homeowner doesn’t have to worry about ongoing payments of principal and interest. Instead, the homeowner sells a percentage of the home’s future equity to a buyer (e.g., Unlock) in exchange for a lump sum of cash. The homeowner can then use that cash to finance other goals, such as renovating or making a down payment on a rental property.

Consider an HEA With Unlock

House flippers, real estate investors, and other homeowners evaluating their financing options may want to consider an HEA. Explore your options today.