Shared Appreciation Loans

City governments and housing agencies are making homes more affordable by partnering with homebuyers on shared appreciation loans.

As a kid, you learned how to share your Barbies or G.I. Joe action figures. As an adult, you must share things like elevator space and toothpaste. All that practice might come in handy, particularly if you're in the market to buy a home and you're short on funds.

The shared appreciation mortgage was modestly popular back in the 1980s, when mortgage rates were prohibitively high. Back then, lenders would offer homebuyers a discounted interest rate in exchange for a share of any increase in the home's value. Consider a home that's worth $200,000 at a time when the market interest rate is 7 percent. A lender might agree to make that loan for 6 percent, but would want to share in 30 percent of the home's appreciation. If the home is later sold for $250,000, the appreciation would be $50,000. The lender's share would be $15,000, or 30 percent of $50,000.

New and improved

This concept is making a comeback, but with a new twist. Some local housing authorities and city governments are now offering shared appreciation loans that function as a second mortgage with deferred repayment. Usually, the agency will fund a portion of the home purchase. The homebuyer makes no repayment until the home is sold. At that time, the homebuyer returns the original amount to the agency along with a certain percentage of the home's appreciation.

An agency might agree, for example, to put $40,000 towards the purchase of the $200,000 home. The purchaser could then buy the home with a $160,000 mortgage plus the $40,000 from the shared appreciation loan. If the home later sells for $250,000, the agency would get the $40,000 back, plus some specified percentage of the $50,000 appreciation.

Helping homeowners, helping communities

Turning the shared appreciation loan into a community building partnership does have its benefits. Home seekers who qualify can more readily realize the advantages of home ownership. They essentially get more buying power without any related monthly repayment obligations. Communities benefit by attracting homeowners and taking an ownership stake in rising real estate values. When the money is returned to the agency, it's reinvested to help another homebuyer. Since the agency receives a share of the home's appreciation, the initial investment partially keeps up with any growth in real estate values.

Not every community offers shared appreciation loans, and not every homebuyer will qualify. Contact your local housing authority or city housing office to learn what programs are available in your area.

Accepting a shared appreciation loan isn't the same things as accepting free money. Remember, you may have to provide a substantial portion of your home's selling price to the lending agency. Such is the nature of sharing-you can accept the money upfront, as long as you're willing to return some of your profit later.