Shared Appreciation Loans

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(Updated February 2015)

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 (SAM) 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.

Shared appreciation loan modifications

Since the economic downturn, yet another form of the shared appreciation mortgage has emerged, this time as a type of loan modification intended to help homeowners in fiscal difficulty. Instead of helping them buy a home, it helps borrowers hang onto the home they already have.

The shared appreciation modification, also called SAM, is targeted at underwater homeowners; that is, those whose homes have lost so much value that they owe more on their mortgages than the homes are worth.

Many of these borrowers face other financial difficulties as well, such as a loss of income, that make it difficult for them to keep up on their mortgage payments. They also have little incentive to do so, since they're essentially throwing good money after bad.

With a shared appreciation modification, the lender writes off a portion of the mortgage balance so the loan is no longer underwater. The borrower's mortgage payments are then recalculated based on the new, loan balance. The borrower therefore gets a lower, more affordable mortgage payment and is no longer stuck with a tab for more than the home is worth, so he or she has an incentive to keep making payments.

In exchange, the lender receives a portion of any appreciation in the home value that many occur between the time of the modification and when the home is sold or the loan is paid off. This is often about 25 percent of the increase.

Such an arrangement benefits both the homeowner and lender in several ways. First, it reduces the likelihood the home will go into foreclosure and lose even more value. It keeps the borrower paying on the mortgage, so the lender continues to get paid and its losses are limited. Finally, it gives the lender a chance to recover up to 25 percent of what was written off, reducing their losses even more.

The lender's 25 percent share of any appreciation is capped at the home's original value, so the homeowner gets to keep any increase in value beyond that. Since the 25 percent share comes due when the loan is eventually paid off, a home equity loan may be required at that time to pay that obligation.

The New York Department of Financial Services established guidelines for such modifications in New York State in 2014, while mortgage service Ocwen Financial has been offering its own SAM program since 2010 in many states. You can check with your own mortgage servicer or with a HUD (Department of Housing and Urban Development) -approved housing counselor in your area to see if the SAM option might be available to you.

A mutual benefit

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.

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