Most people don’t want to even share a bathroom. How would you feel about sharing a mortgage with your lender? Shared Appreciation Mortgages (SAMs), more common in Europe than America, were introduced in the 1980″s and are essentially loan modification mortgage instruments. Still somewhat under the radar, there are currently three lenders that offer SAMs in the U.S. The lenders are Unison, Point and Patch Homes.
What’s is the difference between a “normal” mortgage and a shared appreciation mortgage (SAM)? When a home sells and the owner/borrower has a normal mortgage (20% down payment with a 30 year loan at a fixed interest), the owner/borrower pays the lender the remaining principle balance of the loan and no more. When the owner/borrower has a shared appreciation mortgage and the home sells, the owner/borrower pays the remaining principle balance of the loan PLUS a percentage of the appreciated value for which the home sold.
Here’s an example. Let’s say the owner of the home (who took out a shared appreciation mortgage instrument) originally bought the home for $100,000. Some years later, the home sells for $110,000. The appreciated value of the home is $10,000. With a SAM, the owner would have to pay the lender a percentage of the $10,000. And, the owner/borrower would also have to pay the lender a transaction fee when the sale closes which is usually 2.5% of the lender’s initial “investment” in the home or in the amount the lender paid towards the initial down payment for the home. Let’s say that the lender put down $10,000 for its share in the initial down payment. The fee at 2.5% of $10,000. is $250. The total back to the lender at the time of sale is the agreed upon percentage of the appreciated value and the $250. for the transaction fee.
The key issue here is the percentage amount of the appreciated value of the home…the percentage could be one third at $3,300. or one half at $5,000. or three quarters at $7,500. The key is the percentage amount of the appreciated value of the home when it sells.
So, how does a Shared Appreciation Mortgage loan work? The lender splits the 20% down payment cost with the owner. The SAM lender sees the transaction as an investment, not a loan, and (usually) charges lower rates on the interest component of the package than a conventional lender. The SAM lender gets money on the appreciation component of the package when the home sells.
Why would a borrower do a shared appreciation mortgage? The monthly mortgage payment is lower than a conventional mortgage and it lessens the losses from a principle reduction. Think of borrowers who work in lower paying fields, but live in higher priced markets, or a purchaser going into a jumbo loan mortgage without the full 20% down.
Why would a lender fund a shared appreciation mortgage package? Thomas Sponholtz, chairman and CEO of Unison says,” We come from a background of managing large pools of assets for pension funds and endowments. Our investors have generation-spanning investment time frames. We seek diversification beyond stocks and bonds…if we invest in a house located in an area that we believe will rise in value, we as investors benefit from that appreciated value just as the owner/borrower benefits from that appreciated value when the house sells.”
Like all mortgage and loan modification mortgage instruments, seek legal advice for yourself as a real estate professional and for your client before entering into any sort of agreement or contract.