Home prices increased substantially in the past few years. This rapid increase in home prices has resulted in major equity gains for existing homeowners. As a result, homeowners have been looking to take advantage of this and tap into their newfound home equity.
One option to tap into home equity that has become increasingly popular is a Shared Appreciation Mortgage. While this option is not particularly revolutionary, there are many new mortgage investors offering slightly different versions of this alternative mortgage product.
Shared appreciation mortgages typically work by allowing homeowners to access cash immediately in the form of a little or no upfront interest loan, and usually stand in a 2nd lien position. Rather than having to make monthly payments like a traditional mortgage loan, the lender instead gets a percentage of the property’s future appreciation when it is sold or after a certain period of time passes. These loan products are backed by private lending institutions that typically require higher returns and are usually expensive.
For example, let’s assume you take out a SAM loan of $200,000 on a home worth $1,000,000. The lender agrees to a future share of appreciation at 20%. If you sell that home 10 years later for $2,000,000, the lender would get $400,000 upon the sale closing. This is the original $200,000 loan, along with an additional $200,000 (20% of the additional $1,000,000 appreciation since the arrangement began).
While this might sound incredibly attractive on the surface, it is important to be careful when entering into this type of loan agreement. Home equity is largely derived from appreciation, so giving up a substantial portion can be costly down the road.
While this is not a preferred loan option due to the high cost over time, it may make sense if traditional qualifying fails and a borrower is in need of instant equity and does not have the means to repay the loan. Given that this is a non-traditional mortgage product, it is incredibly important to read and understand the terms of the agreement up front.
If you have questions, please contact our office to discuss your mortgage needs with one of our experienced Mortgage Loan Originators at (760) 930-0569.
