Shared Appreciation Mortgage (SAM)

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Shared Appreciation Mortgage (SAM)

What Is a Shared Appreciation Mortgage (SAM)?

A shared appreciation mortgage (SAM) is one in which the borrower or buyer of a house shares with the lender a portion of the increase in the home’s value. Lender agrees to charge an interest rate that is less than the going market rate in exchange for this extra compensation.

key takeaways

  • In a shared appreciation mortgage (SAM), the purchaser of a home shares a percentage of the appreciation in the home’s value with the lender.
  • In return, the lender agrees to charge an interest rate that is lower than the prevailing market interest rate.
  • A shared appreciation mortgage can have a phased-out clause after a set number of years.

Understanding Shared Appreciation Mortgages

When the property is sold, a shared appreciation mortgage (SAM) varies from a standard mortgage. In a typical mortgage, the borrower makes a predetermined amount of annual principle and interest payments to the lender. If there is still money owing to the bank when the borrower sells the property, the profits from the sale are used to pay down the mortgage.

Let’s use an example where a homeowner borrowed $300,000 and paid it back at the conclusion of the mortgage. Let’s say the house’s worth increased by 20%, from $300,000 to $360,000. Both the selling profits and the 20% gain go to the borrower.

With a SAM, the borrower stipulates that in addition to repaying the mortgage, they will also contribute the lender a share of the home’s increased value. Since you are giving the lender an interest in the increased value of the property, the contingent interest is the name given to the appreciated sum that is paid to the bank. The contingent interest is pre-agreed and is paid to the lender once the property is sold. On a SAM, the bank will often provide a lower interest rate.

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In keeping with the preceding scenario, suppose the borrower and the bank agreed to a shared-appreciation mortgage with a 25% contingency condition. You may remember that the house’s worth increased by $60,000 from $300,000 to $360,000. According to the SAM regulations, the homeowner would provide the bank 25% of the $60,000 increase in value, or $15,000, as payment.

Variations of Shared Appreciation Mortgages

There are several contingents that may be included in shared appreciation mortgages (SAMs). A SAM may include a phase-out provision that allows it to gradually stop existing altogether or lower the percentage paid to the lender. The condition encourages the owner to keep the house and repay the mortgage debt instead of selling it. With some provisions, the contingent interest can totally phase out, leaving the homeowner with no debt at the time of sale.

The phased-out provision might also specify that the borrower is only responsible for paying a portion of home price growth if the property is sold during the first few years. If the borrower sells within five years, a typical phased-out term would require that 25% of the value gain be paid to the lender.

The borrower’s ideal scenario would be to live in the home for five years and, if its value increases, to sell it after that time so that they may retain all of the gains. There may be dangers for the borrower, however. If there is no phase-out provision, the borrower can still be required to pay the bank their share of the increased value even if they don’t sell the house and keep it until the mortgage is paid off.

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Conversely, SAMs assist lenders in recovering any interest that was lost if a borrower sells the home before paying off the mortgage. Banks profit from the interest they charge on mortgage loans, but they lose any future interest payments if a buyer sells the home. If the property is sold, a SAM helps offset part of the interest rate loss on the loan.

Shared Appreciation Mortgages in Practice

Sometime real estate investors and home flippers employ shared appreciation mortgages (SAMs). Investors that buy and refurbish a home in the aim of making a profit are known as flippers. In an expanding real estate market, SAMs for flippers often perform best. However, there is often a deadline for paying back the debt on this kind of mortgage. Properties that don’t sell by the deadline often have the remaining debt refinanced at the current market rate.

When a mortgage debt is underwater or exceeds the value of the house, a SAM may also be used. If the housing market fell after the house was bought, an underwater mortgage may develop. In order to minimize the mortgage debt and bring it in line with the home’s reduced market value, the bank could propose a loan modification. In exchange, the bank can request that the loan be changed to a SAM.

However, there can be various tax issues with SAMs, whereby lenders might not get the same tax treatment for the appreciated gain as borrowers. As a result, it’s important to contact a tax advisor or accountant to help sort out whether it’s worth pursuing a SAM. After that, it’s equally important to research the best shared appreciation mortgage companies to ensure you’re working with the right one for your unique needs.

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