Discover How Shared Appreciation Mortgages Works

You need financing to buy a home, which you can get through mortgages. But which mortgage loan can serve your purpose? Each one has its own importance and application. 

In all mortgages, you would think it means you apply for a loan and make monthly payments to pay it off, right? But it is a different ball game when you talk about the shared appreciation mortgage.

Apart from paying off your mortgage loan, you also need to make additional payments. Why? That is what we will see.

What are Shared Appreciation Mortgages?

You grant a home portion to the loan lender when the property appreciates. In return, the lender agrees to provide a favorable interest rate that is less than the real estate market standards, along with other terms.

You can save a lot of money on your monthly mortgage as you will majorly have the principal payment to deal with, as the interest rates will decrease.

When you sell your home, a specified percentage of the home appreciation will go to the lender. You will also have to repay the outstanding mortgage payments.

How Does Shared Appreciation Works?

The shared appreciation loans might be different from your everyday mortgage. That is why to tell you how it works, here is an example.

Suppose you have taken a $600,000 shared appreciation loan. After a 15% down payment, your outstanding mortgage loan decreases to $510,000. In addition to the deal, you agree to give 25% of the property appreciation once it is sold.

Now, imagine you decide to sell the property after 10 years, and the home value has appreciated to $750,000. At this point, suppose your outstanding mortgage loan is $400,000.

Usually, you have to use the proceeds after selling the home to pay off the mortgage loan, and that’s that. But in shared appreciation mortgages, you also need to pay the additional home appreciation percentage that was decided.

In this case, along with the $400,000 outstanding mortgage, you will also pay 25% of the home appreciation. Since the property was valued at $600,000 when buying the home and it increased to $750,000, the appreciation is (750,000 – 600,000) $150,000.

So, apart from the outstanding mortgage loan ($400,000), you will pay 25% of $150,000 (150,000 x 0.25) $37,500.

When to Go For Shared Appreciation Mortgage

Just because you have the option of sharing your home selling profits does not mean you have to go for it. There are certain situations where opting for the shared appreciation mortgage can be the right option. Here are some of them.

Traditional Mortgage is Hard to Achieve

The different types of mortgages might be tempting, but they may not be as easy to apply for. It can be tough to meet the requirements of these traditional mortgages to approve loan applications.

That is where shared appreciation mortgages ease up the acceptance criteria. Usually, there is no need for a high credit score or a large down payment. This helps you, the borrower, to fulfill your financing needs with shared appreciation mortgages.

Need Flexible Repayments

You have just started your professional career, and your source of income is not a consistent one. That is where you may require flexibility in your loan repayments, like prepayments and high extensions.

The full mortgage repayment is due only when you sell the house and earn profit with property appreciation, and monthly mortgage payments are comparatively low. This improves your mortgage affordability.

Less Interest Cost

Ultimately, a shared appreciation mortgage is a trade-off between reducing your interest cost and paying a higher cost later when selling the home. If you are ready to take that deal, it is a good idea to opt for a shared appreciation mortgage and save a lot of your monthly mortgage.

Pros and Cons of Shared Appreciation Mortgages

Along with all the benefits of shared appreciation mortgages, there are potential disadvantages that you need to know about. Knowing both sides of the coin will help you decide whether to go for this mortgage option or choose another one.

That is what we will talk about. 

Advantages of Shared Appreciation 

Higher Loan with Reduced Monthly Payments

Usually, when you opt for a high loan, your monthly expenses will also rise in the form of greater mortgage payments. But you can escape that headache when you opt for a shared appreciation mortgage.

Since the interest rate is low, this can significantly reduce your mortgage payments and help you save money.

Flexible Terms

In the middle of the loan period, suppose you don’t like a certain contract clause. Unlike most mortgages where the predefined conditions cannot change, you can negotiate with the lender and make changes to terms. You to can manage your debt better and make on-time mortgage payments.

Might Not Have to Pay When Selling

Here is a question that you would already have in your mind, “What happens if the property does not appreciate when I sell it?” There are a lot of uncertain factors that can impact your property value.

You might not even have to pay the percentage of payment after your home is sold.

Every lender takes a different approach in such a situation. But just to be safe, we recommend you ensure your contract mentions what will happen if such a situation arises.

Disadvantages of Shared Appreciation

Might Be More Expensive

Home value appreciation is often a good thing, as you can sell your home for a profit. But in shared appreciation loans, the higher your home appreciates, the more profit you will have to share with the lender.

This can decrease your savings and might even cost you more than the conventional mortgage.

Limited Eligibility

Shared appreciation mortgage eligibility is not only determined by the credit score, debt-to-income ratio, or down payment. You may not be eligible for the shared appreciation mortgage as it is limited to people of certain incomes and geographic locations.

Increased Cost

You are already sharing a lot of your profits, and that is not all. The shared application loan comes with additional costs like origination cost (around 4% of the loan amount) and home appraisal cost to know about your property appreciation.

The Bottom Line 

This was all about shared appreciation mortgage and what you can expect when choosing to finance your home. 

If you need reputable real estate to find a preferred home, check out HAR. We are a Texas-based real estate that connects people with their desired destinations.