What is a shared appreciation mortgage (SAM)?

This alternative mortgage option can offer lower rates

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A shared appreciation mortgage (SAM) is a type of home financing where the borrower promises a portion of the home’s appreciation to the lender in exchange for a lower interest rate.

This type of mortgage generally benefits both parties: the lender gets a share of the profit from a future home sale (known as contingent interest), and the borrower pays less interest and has a lower monthly mortgage payment.

Although a SAM may help potential home buyers afford to buy a house, they may end up owing more in shared appreciation to the lender than their remaining mortgage balance.

Key insights

A shared appreciation mortgage (SAM) is a home loan where the borrower agrees to share a percentage of the home’s future appreciation with the lender.

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In exchange for the shared appreciation, the lender will grant a lower interest rate to the borrower.

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While you can receive a lower interest rate with a SAM, depending on your loan agreement, you'll likely have to share in the profits of your future home sale.

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How shared appreciation mortgages work

A SAM functions similarly to a regular mortgage, but the lender receives a percentage of the home's appreciation when you sell it.

When you sell your home with a regular mortgage, you simply pay the lender the remaining amount left on the loan. However, with a SAM, you must pay off the mortgage and give the lender contingent interest (a portion of the home’s appreciation value).

Mortgage lenders can build various contingencies into shared appreciation mortgages. For example, a SAM could include a phased-out clause that states that the borrower only has to pay shared appreciation if they sell within a certain amount of time.

Say you receive $300,000 from a lender in exchange for a shared appreciation mortgage. Upon selling your home for $400,000, you will repay the original $300,000 plus 20% of the home's appreciation ($20,000), totaling $320,000.

Shared appreciation vs. home equity agreements

With a home equity agreement (HEA), the homeowner sells a portion of their property’s ownership in exchange for a lump sum payment. Unlike a SAM, a home equity agreement doesn't involve borrowing funds, which you must repay with interest.

Pros and cons of a SAM

A shared appreciation mortgage can help homebuyers afford to buy a house. Here are the most significant benefits of a SAM:

  • Lower interest rate: With a SAM, you can secure a lower interest rate, resulting in lower monthly mortgage payments.
  • Easier qualification: If you're having trouble qualifying for a traditional mortgage, a SAM could make lending you money more appealing to financial institutions.
  • Potential to come out ahead: Depending on your loan agreement, you may not owe anything if your home does not appreciate in value or if you take a loss when you sell it.

While there can be benefits to SAMs, you'll have to pay a portion of the profits to your lender when you sell your home. Here are some of the primary drawbacks of a shared appreciation mortgage:

  • Shared profits: In exchange for a lower interest rate, the borrower promises the lender a portion of the future profits from the sale of their home.
  • Potential to owe more: If your property value rises substantially, you may owe more in shared appreciation to the lender than what you have left on your mortgage.
  • Difficult to find: SAMs aren’t as widely offered by most lenders compared to traditional mortgages, so they may be challenging to find.

» LEARN: How does a mortgage work?

When to use a shared appreciation mortgage?

“SAMs can be a strategic choice, especially in specific scenarios,” said Rhett Stubbendeck, the CEO and founder of Leverage Planning, a digital lending and insurance marketplace for physicians.

“The deal with a SAM is pretty straightforward: you pay less in interest or initial payments in return for sharing some of your home's future appreciation with your lender. This setup can make immediate home ownership more affordable if you’re in a rapidly growing market,” Stubbendeck explained.

While a shared appreciation mortgage can improve the affordability of a home, it may not be ideal for everyone.

“If you're planning to stay in your home long-term and want to capitalize on its full appreciation potential, a SAM might not be your best bet,” Stubbendeck continued. “The same goes for those in stable or slowly appreciating markets; the trade-off simply might not be worth it.”

» COMPARE: Mortgage lenders

Alternatives to a shared appreciation mortgage

With a SAM, there is a chance that you would owe more in shared appreciation than your remaining mortgage balance. While a SAM may help you secure a lower interest rate, you may want to consider alternatives:

  • Improve your credit score: One of the most effective ways to get the lowest interest rate is to increase your credit score. Borrowers with very good to excellent credit scores, typically above 740, tend to receive the best interest rates from lenders.
  • Shop around: Before signing onto a loan, you should compare different mortgage lenders and rates. It can ensure you receive the best offer available.
  • Apply for down payment assistance: Making a larger down payment toward your home purchase can secure a lower interest rate since you're borrowing less money. If you’re a first-time homebuyer and can't afford a substantial down payment, you can try applying for special programs or grants for assistance.
  • Pay for discount points: You can also receive a lower interest rate by paying additional money up front with discount points. However, it's essential to first have a minimum down payment of at least 20%.

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    What happens if I can't make my SAM payments?

    If you can't make your SAM payments, you may incur fees and penalties. Continued nonpayment may lead to default, foreclosure or loss of the property.

    How do I sell my home if I have a SAM?

    You can sell your home the same way you would with a traditional mortgage. However, you must pay the specified percentage of the home’s appreciation to the lender along with the remaining mortgage balance.

    Can I refinance my SAM?

    Refinancing a SAM may be more complicated than refinancing a traditional mortgage. Check with your lender to find out their terms.

    Are SAMs available in all states?

    SAMs are generally not widely available, so you may not be able to find a lender offering them in your state.

    Bottom line

    A shared appreciation mortgage is a type of mortgage loan where you trade part of your home's future appreciation for a lower interest rate from the lender.

    Although a SAM can make buying a home more affordable, there are certain risks involved that you should be aware of before signing.

    There may be better alternatives that can score you a lower interest rate, such as improving your credit score, making a larger down payment, buying discount points and applying for assistance.

    Article sources

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

    1. Equifax, “What is a Good Credit Score?” Accessed April 19, 2024.
    2. Consumer Financial Protection Bureau, “Seven factors that determine your mortgage interest rate.” Accessed April 19, 2024.
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