Shared Appreciation Mortgage

Shared appreciation mortgage is when the borrower gives the mortgage lender a portion of the real estate property's appreciation in return for a lower rate of interest. 

To illustrate, a lender who would otherwise charge 15% interest might agree to take 10% interest plus one-third of the appreciation of the property. The lender is accepting what amounts to a speculative investment in the property in return for a reduced interest rate. The borrower is able to buy and occupy a home that he or she might not otherwise be able to afford, but gives up part of any future price appreciation. In August, 1980, $2 1/2 million of shared appreciation loan money was offered by a Florida S&L. The prevailing market rate at the time was 12% and the loans were offered at 8% with one-third of the appreciation going to the lender. All real estate loans were taken by the end of the next business day. 

Despite the apparent advantages of the shared appreciation mortgage, there are some major pitfalls. For example, at what point in the future is the gain recognized and the lender paid off? If the home is sold, the profits can be split in accordance with the agreement. However, what if the lender feels the home is being sold at too low a price? What if the home is not sold for cash? What if the borrower does not want to sell? One answer to the last situation is that the lender may set a time limit of 10 years on the loan. If the home has not been sold by that time, the home is appraised and the borrower pays the lender the lender's share of the appreciation. At a 10% appreciation rate, a $93,750 house would be worth $243,164 ten years later. If the lender was entitled to one-third of the $149,414 appreciation, the borrower would owe the lender $49,805 in appreciation plus the remaining $70,000 balance on the loan. Unless the borrower can pay cash, this would have to be refinanced at then current rates of interest. On the other hand, if the real estate property experiences no appreciation in value, the borrower will have enjoyed a below-market-rate loan for 10 years and be responsible only for refinancing the remaining loan balance at that time.

Shared Appreciation Mortgage to Home Financing