Do you want to buy a home soon? While the process is exciting, you want to make sure you do your homework and make the right decisions since it’s likely the biggest purchase you’ll make.
Before you start shopping for homes that fit your needs and budget, it’s essential to scope out financing options. During your search, you could quickly discover that interest rates are steep, home prices are high, or that you don’t have enough saved up for the down payment.
But you may not have to put your homeownership plans on hold. A shared appreciation mortgage could help you move forward with the purchase. Read on to learn how they work, key benefits and drawbacks to consider, and how they differ from shared equity and home equity products. You will also discover how to tap into the equity on your existing home if you’re torn between selling or staying put.
Access Your Home Equity
What Is a Shared Appreciation Mortgage (SAM)?
A shared appreciation mortgage (SAM) gives borrowers a reduced down payment or interest rate to help them get into the home of their dreams. In exchange, in addition to interest, the lender receives a percentage of the change in the value of the property when the agreement ends.
These loans are generally available through government agencies in conjunction with a private lender and require the principal balance to be repaid within a set period.
How Does a Shared Appreciation Mortgage Work?
Assume you want to borrow $455,000 but don’t have much saved. The lender agrees to loan you this amount with a reduced interest rate and lower down payment in exchange for a 25 percent share of the change in your home’s future value.
You sell the home six years later for $495,000. After you pay off the mortgage with the sales proceeds, the lender will also get $10,000, which is 25 percent of the value appreciation of your home. But what happens if the home doesn’t increase or goes down value? The lender does not receive any additional funds.
Is a Shared Appreciation Mortgage for You?
If you’ve shopped for mortgages but aren’t fond of the quoted interest rates, a shared appreciation mortgage could be ideal. You should also consider this option if you’re struggling to save up for a down payment.
Before deciding if a shared appreciation mortgage is right for you, consider the benefits and drawbacks.
Pros & Cons of Shared Appreciation Mortgages
This loan product offers the following perks:
- Lower down payment: You could get into a new home without putting a dent in your savings account to cover the down payment in exchange for a share of the appreciated value of your home.
- Reduced interest rate: Shared appreciation mortgages come with low interest rates that are generally less than the set market rate. This could lower your monthly payment and save you a bundle in interest over the life of the loan.
Unfortunately, shared appreciation mortgages also come with advantages to be mindful of:
- Limited availability: These loans usually aren’t available through most banks, credit unions, and online mortgage lenders.
- Reduced profits: Even if your home value has increased tremendously, you will have to share your profits with the lender per the terms of the agreement.
Access Your Home Equity
What is a Home Equity Investment?
A home equity investment is a debt-free way to tap into your home’s equity. An investor will give you a lump sum of cash today in exchange for a share of your home’s future appreciation.
There are generally no restrictions on how the funds can be used, and you won’t accrue interest or make monthly payments. Generally, you will have between 10 and 30 years, depending on the investor, to sell your home or buy out the agreement.
How Does a Home Equity Investment Work?
Here’s a step-by-step breakdown of how a home equity investment works:
- Step 1: Work with an investor to determine the value of your home. Most will require an appraisal before extending a cash offer.
- Step 2: Review the investor’s offer and decide how much equity you want to access.
- Step 3: Execute the agreement by signing the closing documents.
- Step 4: Receive your cash and use it however you see fit.
- Step 5: Buy out the investor or sell your home at the end of the agreement. Regardless of which option you choose, the investor will receive an amount equal to the initial investment plus the percentage of the home’s appreciation they’re entitled to. If you sell your home and take a loss, the investor could also share in the losses.
Pros and Cons of Home Equity Investments
Keep these benefits in mind if you’re considering a home equity investment:
- Less stringent qualification criteria: Depending on the investor, you could qualify for a home equity investment with a credit score as low as 500. Plus, some investors do not have a minimum income requirement.
- No monthly payments: A home equity investment isn’t a loan, so you won’t make monthly payments on the amount you receive.
You also want to be mindful of these drawbacks:
- You may have to sell your home: If you’re unable to buy out the agreement at the end of the contractual period, you could be forced to sell your home to pay the investor.
- Lower cash value relative to equity: Generally, the percentage of equity the investor receives isn’t equivalent to the lump sum of cash disbursed to the homeowner.
- Share of Profits: If home value has increased, you will have to share your profits with the investor as per the terms you agreed to.
How to Access Your Home Equity Without a Loan
Shared appreciation mortgages only make a small percentage of the mortgage market in the U.S. Consequently, you’ll likely want to find another way to get better terms on a new home purchase.
But suppose you’re currently in a home and are torn between relocating or staying put. In that case, the latter could be more sensible if you have equity built up. You could use the cash to improve your life, even if you’ve experienced challenges when applying for a home equity loan, HELOC or cash-out refinance.
Consider the HomeOwner program from Unison for a debt-free solution to convert your equity to cash. You could be eligible if you have an owner-occupied single-family home, condominium, or townhome.
Unison will offer you a lump sum of cash, or a co-investment, in exchange for a share of the increase or, in most cases, a decrease in your home’s future value. You could get approved for up to 17.5 percent of your home’s value (limited to $500,000) if you have a credit score of at least 620.
There are generally no restrictions on how the funds can be used. Some homeowners fund their retirement or make home renovations while others pay off high-interest debts.
Even better, you’ll retain ownership rights to your home and have up to 30 years to decide if you want to sell or buy Unison out. Unison will get the original co-investment amount plus the agreed-upon percentage of the home’s increase in value when the contract ends. But if the property value has decreased, in most cases, Unison will share in the losses.