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Shared Appreciation Mortgage
Shared appreciation mortgage is a type of mortgage loan that allows the lender to reap future profits, if any, from the collateral property when it is eventually sold. In turn the lender offers a lower interest rate to the borrower. Under the term on shared appreciation mortgage, the borrower agrees to sell his or her home in a specified number of years.
If, however, the borrower decides not to sell the home at the agreed time, he or she must pay the lender its share of the property appreciation in cash. The share of the appreciated value is called contingent interest. In case the borrower does not have the required amount in cash to pay the contingent interest, the lender has the legal right to force to borrower to sell the property to satisfy their claim.
Here is an example of shared appreciation mortgage. Suppose you decide to take out a shared appreciation mortgage with the interest rate of 4% on the loan. The term also states that the lender will receive one third of any appreciation after ten years. At the end of the ten years, you happen to change your mind and do not want to sell the property. If that is the case, an appraisal needs to establish the appreciation amount of your property ten years after the time you first obtained the loan. Then you must retire the loan by refinancing the amount of unpaid balance plus the appreciation share with a new loan.
There are many private programs out there that offer an interest rate concession on the first mortgage. Some even offer the rate reduction on a second mortgage.
By offering shared appreciation mortgage loans, the lender also takes an addition risk since the appreciation is dependent of the conditions of the housing market at the time the property is sold. In this case, if the borrower sells the property for a loss, the contingent interest needed to pay back the lender will automatically be zero.
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