Shared Appreciation Mortgage: All You Need to Know

Learn how shared appreciation mortgages work.

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 is not a loan.

According to a recent article, the 25-year average for home appreciation is 3.9% per year, which can provide considerable returns over time.

A home’s future value is a tool that lenders and borrowers alike can leverage by using shared appreciation mortgages (SAMs). 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. That term is most often 15 or 30 years.

The same elements of a traditional mortgage apply to a SAM, 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, a borrower who purchased a home for $300,000 with a SAM of 50% would pay $25,000 to the lender if that borrower were to later sell the house for $350,000.

Below are several examples of how shared appreciation mortgages work.

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, a borrower who purchased a home for $300,000 with a SAM of 50% would pay $25,000 to the lender if that borrower were to later sell the house for $350,000.

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

For most individuals and families in the U.S., their home is one of their greatest sources of wealth. of that wealth comes from the home’s appreciation over time. This begs the question of why a homeowner might be willing to share some of that wealth with a lender. The reason is that, in exchange for the share of appreciation, a lender will generally offer the borrower an interest rate lower than what that may otherwise qualify for.

The Difference Your Interest Rate Makes.jpeg

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. One such example is a SAM with a phase-out clause. A phase-out clause for a SAM 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 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.

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.

Home appreciation in 2021 showed significant gains, with many states seeing an increase of more than 10%, which may further change the potential upside of a SAM for a borrower.

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 an HEA, such as 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 an HEA is not a loan. This means a homeowner does not have to worry about short-term payments of interest and principal. 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.

Unlock’s FAQ contains additional information about how HEAs work.

Consider an HEA With Unlock

House flippers, real estate investors, and other homeowners evaluating their financing options may want to consider an HEA. With Unlock, you can easily enter a few simple details through an online form to see your potential eligibility.

Contact Unlock today for questions about a home equity agreement.