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What is a Shared Equity Mortgage
A shared equity mortgage is a joint ownership arrangement between an investor and a homebuyer or current homeowner. In this agreement, both the borrower and the lender have equity in the home and split either gains or losses following the sale of the house or property.
You can enter into a shared equity loan before buying a property if you get an investor to pay a portion of the down payment in return for equity in the house upfront.
Home Equity Sharing Agreements
Home equity sharing agreements are when you give up a percentage of equity in the home you’re living in for a lump-sum loan. It’s a method of using your current home for an influx in funds, similar to a home equity loan or a home equity line of credit (HELOC). But, unlike a home equity loan or HELOC, this process gives up equity in your home and future appreciation.
Home equity sharing agreements can be beneficial if you’re struggling with poor credit and can not qualify for a conventional or FHA loan. They do not require monthly payments, however, they may require large repayments later.
Shared Equity Mortgage Pros and Cons
|Easier qualifications (lower credit score & income requirements)
|Repayment amounts are large; unlikely you’d be able to pay off total without selling property or borrowing more money from a different lender
|No monthly payments
|Number of companies who offer shared equity loans is low, with some not authorized to operate in your location
|No interest (not a loan, but an investment in your property)
|Loan amount is much lower than HELOCs/home equity loans; if the equity you own is a low amount, then you could find yourself getting a small loan, or none at all
|No restrictions on how you can use the money you get for the agreement
|Reduced profit after selling the home since the lender/investor will receive a percentage of appreciation
» MORE: See today’s refinance rates
Types of Shared Equity Mortgages
You have two shared equity mortgage options available, with the key difference between the two being how the investor would be paid back if the property is sold.
Share of Appreciation Model
The first type is the “share of appreciation” model, which requires repaying the initial loan amount plus a portion of the home’s appreciation.
Example: You and an investor agree to a share of appreciation model with a $35,000 loan and a 30% future appreciation agreement on a $425,000 house. After five years you sell the house for $500,000. You would pay the investor back the initial amount of $35,000 plus 30% of $75,000 in appreciation, which would be $22,500. So your total payback would be $57,500.
Share of Home Value Model
The other type is the “share of home value” model, which demands a percentage of the home’s sale value. In this model, if the value of the home decreases, the amount you pay back to the investor will also decrease.
Example: You and an investor agree to a 10% share of home value equity agreement on a house worth $425,000. When you sell it 3 years later, suppose it only sells it for $405,000, then you would pay the investor $40,500 (10%). But if it were to sell for $445,000, then you’d pay the investor $44,500 (10%).
Shared Equity Loan Tax Benefits
Housing associations, local municipalities, and first-time homebuyers tend to take advantage of home equity mortgages for tax purposes. If you have a family member do a home equity sharing agreement, they can avoid paying gift taxes. If a relative acts as an investor, they could deduct their mortgage interest and property depreciation from their taxes.
These agreements suit homeowners with substantial equity but poor credit or financial limitations. They can also be beneficial in buying property in high-cost living areas where buying a house may be difficult for first-time homebuyers. However, they may not be the best choice for those with good credit and stable income. Speak with a tax specialist and a loan specialist before making this decision with your home.