Definition
A Shared Appreciation Mortgage (SAM) is a specialized residential loan with a fixed interest rate set below market levels. The unique feature of SAMs is that the lender is entitled to a predefined share of the appreciation in the property’s value over a stipulated period. Loan payments are amortized over a long-term maturity, but the borrower usually needs to repay the full loan amount after a shorter period. The appreciation amount is determined either by the home’s sale or by an appraisal if the home is not sold.
Examples
Example 1: Hogan’s Shared Appreciation Mortgage
Hogan secures a Shared Appreciation Mortgage with a 4% interest rate. According to the terms, the lender receives one-third (⅓) of any appreciation in the property’s value over 10 years. At the end of the 10-year term, Hogan chooses not to sell the home. Consequently, an appraisal is conducted to determine the property’s appreciation. Hogan then refinances with a new loan covering the remaining balance and the lender’s share of the appreciation.
Frequently Asked Questions (FAQs)
What is the main advantage of a Shared Appreciation Mortgage?
The primary benefit of a SAM is the lower-than-market fixed interest rate, making initial loan payments more affordable compared to traditional mortgages.
How is the appreciation share calculated if the property is not sold at the end of the term?
If the property is not sold, its appreciation is determined through an appraisal. The borrower’s repayment includes the loan’s unpaid balance plus the lender’s share of the appreciation.
Can a SAM be used for any residential property?
Shared Appreciation Mortgages can generally be used for various types of residential properties, but the eligibility may depend on the lender’s specific criteria and the property’s value.
What happens if the property does not appreciate or depreciates in value?
If the property does not appreciate or depreciates, the lender only recovers the outstanding balance of the loan without any additional profit from appreciation. Borrowers benefit from the initially lower interest rates under these circumstances.
Are there any risks associated with a SAM?
Yes, risks include the possibility that the property appreciates significantly, leading to a high repayment amount. Borrowers might also face challenges in refinancing, especially if the property value remains stagnant or decreases.
Amortization
Amortization: The process of spreading out a loan into a series of fixed payments over time.
Refinancing
Refinancing: The process of replacing an existing loan with a new one, typically to take advantage of better terms such as lower interest rates.
Appraisal
Appraisal: An assessment of a property’s value conducted by a certified professional to establish its market value.
Interest Rate
Interest Rate: The percentage charged on a loan, representing the cost of borrowing the money.
Property Appreciation
Property Appreciation: The increase in a property’s market value over time.
Online Resources
References
- Investopedia Contributors. (2022). “Shared Appreciation Mortgage (SAM).” Investopedia.
- Consumer Financial Protection Bureau. “What is a shared appreciation mortgage?”
Suggested Books for Further Studies
- “Real Estate Investing For Dummies” by Eric Tyson and Robert S. Griswold: A comprehensive guide to various real estate investment strategies, including SAMs.
- “Real Estate Finance & Investments” by William Brueggeman and Jeffrey Fisher: An advanced resource detailing various real estate financing options.
- “Principles of Real Estate Practice” by Charles J. Jacobus: A detailed textbook covering fundamental real estate practices and financing mechanisms.
Real Estate Basics: Shared Appreciation Mortgage Fundamentals Quiz
### What is the main distinctive feature of a Shared Appreciation Mortgage?
- [ ] A variable interest rate based on market trends.
- [x] A fixed interest rate below market levels with a share in the property's appreciation.
- [ ] The requirement for a balloon payment at term end.
- [ ] No requirement for property appraisal.
> **Explanation:** The main distinctive feature of SAMs is that they offer a fixed interest rate below market rates, and the lender gets a share of the property's appreciation over a certain period.
### Who benefits from the property's appreciation in a Shared Appreciation Mortgage?
- [ ] Only the borrower
- [ ] Only the lender
- [x] Both the borrower and the lender
- [ ] The government
> **Explanation:** In a SAM, both the borrower and the lender benefit from the property's appreciation. The lender gets a predetermined share, while the borrower benefits from any remaining increase in property value.
### What triggers the calculation of the appreciation share in a SAM?
- [ ] The initial mortgage application.
- [ ] Annual interest rate review.
- [x] Sale of property or formal appraisal at the term end.
- [ ] Changes in local property tax rates.
> **Explanation:** The appreciation share is typically calculated at the end of the loan term, either through a sale of the property or a formal appraisal if the home is not sold.
### What is one of the risks associated with Shared Appreciation Mortgages for borrowers?
- [ ] Lack of property insurance
- [ ] Higher initial interest rates
- [x] High repayment amounts if the property appreciates significantly
- [ ] Fixed interest rates becoming variable
> **Explanation:** One of the risks associated with SAMs is that high property appreciation can lead to a significant repayment amount, which could be challenging for borrowers.
### Can Shared Appreciation Mortgages offer lower initial monthly payments?
- [x] Yes
- [ ] No
- [ ] Only if the property depreciates
- [ ] Only with variable interest rates
> **Explanation:** Yes, SAMs can offer lower initial monthly payments due to their below-market fixed interest rates.
### What is required at the end of the term if there is no property sale in a Shared Appreciation Mortgage?
- [ ] A variable interest rate reset
- [ ] Property tax reassessment
- [x] An appraisal to determine the appreciation amount
- [ ] Payment of property maintenance fees
> **Explanation:** If there is no property sale at the end of the term, an appraisal is required to determine the appreciation amount.
### Why might a borrower consider refinancing after a SAM term ends?
- [ ] To increase property value
- [x] To retire the original loan including the appreciation share
- [ ] To avoid new appraisal fees
- [ ] To lower property maintenance costs
> **Explanation:** A borrower might consider refinancing to retire the original loan, which now includes the lender's share of the property's appreciation.
### How does an appraisal function in the context of a SAM?
- [x] It determines the property's value for sharing the appreciation
- [ ] It lowers the interest rates automatically
- [ ] It adjusts property taxes
- [ ] It changes the loan's amortization process
> **Explanation:** An appraisal is used to determine the property's value at the end of the SAM term to calculate the lender's share of the appreciation.
### Which scenario would end up being most problematic for a borrower in a SAM?
- [ ] A decrease in property taxes
- [ ] No change in property value
- [x] Significant property appreciation resulting in a high repayment amount
- [ ] Positive neighborhood redevelopment
> **Explanation:** Significant property appreciation would be problematic as it could result in a high repayment amount due to the lender's share in the increased value.
### What aspect should be carefully considered before opting for a SAM?
- [ ] Historical property tax rates
- [x] The potential future appreciation of the property value
- [ ] Nearby school district rankings
- [ ] Color of the property's exterior
> **Explanation:** Before opting for a SAM, it is essential to consider the potential future appreciation of the property value since it will impact the repayment amount.
