What is a Shared Appreciation Mortgage (SAM)?
A Shared Appreciation Mortgage (SAM) is a unique residential loan that offers a fixed interest rate below market rates. In exchange, the lender receives a specified share of the appreciation in the property’s value over a determined period. While the loan payments are designed to amortize the loan over a long term, repayment is typically required much sooner.
How Does a Shared Appreciation Mortgage Work?
In a SAM, the loan amount and the interest are pre-determined, but a crucial component is the lender’s share in the property appreciation. The appreciation amount is assessed either through the sale of the home or by an appraisal if the sale does not occur within the agreed period.
Example Scenario
Let’s take an example to understand SAM better:
Imagine Hogan obtains a shared appreciation mortgage. In this scenario, the interest rate on Hogan’s loan is 4%, significantly lower than the current market rate. However, the lender gains a right to one-third (⅓) of any appreciation after 10 years of the loan term.
At the conclusion of the 10-year period, Hogan decides not to sell the house. An appraisal is needed to establish how much the property has appreciated. Based on the appraisal, Hogan is then required to retire the existing loan. This is generally done by refinancing, which entails taking out a new loan to cover the unpaid balance along with a third of the property’s appreciation.
Benefits of a Shared Appreciation Mortgage
- Lower Initial Interest Rates. SAMs usually offer a lower interest rate compared to conventional loans.
- Reduced Monthly Payments. The lower interest rate can lead to reduced monthly mortgage payments.
- Flexible Term. While the loan is designed for long-term amortization, it can be paid off early.
Risks and Considerations
- Appreciation Share. The future requirement to share property appreciation with the lender could result in significant costs.
- Property Appraisal. If the property does not appreciatively rise or depreciates, the borrower still needs to handle repayment logistics.
- Mandatory Repayment Period. Borrowers may need to refinance or come up with the funds within the shorter repayment period, which could pose financial challenges.
Frequently Asked Questions
Q: How does appreciation calculation work in SAM?
A: The property’s appreciation is typically determined either by selling the home or through an official appraisal if there’s no sale at the end of the specified period.
Q: Is there flexibility in the repayment terms?
A: While SAMs are set to amortize over the long term, repayment is commonly required after a shorter term. Borrowers may need to refinance the loan at that point.
Q: What happens if my property doesn’t appreciate?
A: If the property does not appreciate or depreciates, the borrower will still owe the remaining loan balance; however, the shared appreciation typically would not apply in a depreciation scenario.
Related Terms: Fixed-rate mortgage, Adjustable-rate mortgage, Real estate investment, Home appraisal, Refinancing.
