Understanding Shared-Appreciation Mortgages: Unlocking Potential Benefits
A shared-appreciation mortgage (SAMs) allows a third party to share in the profits made off the sale of a property. This third party is often a lender but can be anyone stipulated on the mortgage. In a real estate transaction, the lender may agree to drop the interest rate on a mortgage in exchange for a percentage of any appreciation seen on the property when the borrower sells it in the future.
While potentially lucrative, such mortgages carry greater risk for the lender. If the property value increases when the borrower decides to sell, the lender benefits proportionally to the agreed-upon percentage of appreciation. Conversely, if there is no appreciation or even depreciation, the lender does not receive any profit.
Example of a Shared-Appreciation Mortgage§
Consider a borrower who purchases a property for $500,000 with a lender agreeing to a 20% shared-appreciation mortgage. If the borrower subsequently sells the property for $750,000, the lender would obtain 20% of the appreciation, totaling $50,000. It’s important to note that while the borrower may enjoy lower interest rates, they also share a portion of the property’s potential appreciation.
Shared-appreciation mortgages can be an appealing choice in a rising market but could leave the lender with little or no additional return in less favorable market conditions.
Related Terms: mortgage interest rates, property appreciation, real estate investments.
