Introduction to Shared Appreciation Mortgages
Mortgages are defined as being a loan that has been secured using real estate. A shared appreciation mortgage is as its name indicates, a mortgage where the borrower agrees to pay part of the appreciation in the value of the real estate used to secure the mortgage to the lender. The lender’s share of the real estate’s appreciation is called the contingent interest, being due once either the real estate has been sold or the mortgage ended. For example, if a shared appreciation mortgage stipulates 10% in contingent interest and the borrower sells the Boston real estate for $200,000 in profit, that borrower must pay $20,000 to the lender as its share of the appreciation in value.
Pros of Shared Appreciation Mortgages
|Image by Wall Street Journal|
For the borrower, the overwhelming advantage of taking out a shared appreciation mortgage are lowered interest rates compared to the prevailing interest rates on the financial market. Having a decreased interest rate means that the borrower is being charged less in interest, more of the monthly payments are going towards paying off the principal rather than the interest, and thus make smaller monthly payments while still paying off the mortgage in the same length of time.For the lender, the advantage is even simpler. This being the potential that the contingent interest at the end of the shared appreciation mortgage will more than make up for its decreased profits due to it lowering interest rates.
Cons of Shared Appreciation Mortgages
For both the borrower and the lender, the main problem with shared appreciation mortgages comes from the sum of the contingent interest being unpredictable. Although a general statement can be made that the value of houses and real estate rise in the long run, the same is not true of price trends in the short-term. As a result, short-term economic conditions can easily make a shared appreciation mortgage more expensive than normal mortgages for borrowers and the contingent interest less profitable than the missed interest revenue for lenders. In general, borrowers benefit if the value of real estate either remain steady or fall, while lenders benefit so long as values continue to rise.