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Encyclopedia > Shared appreciation mortgage

A shared appreciation mortgage is a mortgage in which the lender agrees as part of the loan to accept some or all payment in the form of a share of the increase in value (the appreciation) of the property. A mortgage is a method of using property as security for the payment of a debt. ...


In the UK

A shared appreciation mortgage is a mortgage arranged as a form of equity release. The lender loans the borrower a capital sum in return for a share of the future increase in the growth of the property. The borrowers retain the right to live in the property until death. The older the client the smaller the share required by the lender. A mortgage is a method of using property as security for the payment of a debt. ... Equity release is the method of releasing equity (money) from your main residence without having to move out of it. ...


In the US

A shared appreciation mortgage is a mortgage in which the lender agrees to an interest rate lower than the prevailing market rate, in exchange for a share of the appreicated value of the collateral property. The share of the appreciated value is known as the contingent interest, which is determined and due at the sale of the property or at the termination of the mortgage. A mortgage is a method of using property as security for the payment of a debt. ...


For instance, suppose the current prevailing interest rate is 6%, and the property was purchased for $500,000. The borrower puts down $100,000 and takes out a mortgage of $400,000 amortized over 30 years. The lender and the borrower agree to a lower interest rate of 5%, and to a contigent interest of 20% of appreciated value of the property. Because of the lower interest rate, the monthly payment is reduced from $2,398 to $2,147. However, this saving in monthly payments comes with a trade-off. Suppose the property is later sold for $700,000. Because of the agreement on the contingent interest, the borrower must pay the lender 20% of the profit, namely, $40,000.


By participating in the appreciation of the property, the lender takes an additional risk that is related to its value. Hence, whether this is a favorable trade-off depends on the conditions of the housing market. A shared appreciation mortgage differs from an equity-sharing agreement in that the principal of the loan is an unconditional obligation (to the extent collateralized by the property). Thus, if the property’s value decreases, the borrower would still owe whatever principal is outstanding, and if the borrowers sells the property for a loss, the contingent interest is simply zero.


Revenue Ruling 83-51 (1983) of the Internal Revenue Service specifies conditions under which the contingent interest in a shared appreciation mortgage may be considered tax-deductible mortgage interest. In particular, a shared appreciation mortgage must stipulate an unconditional obligation of payment of principal to avoid being recharacterized as an equity-sharing agreement, which may lead to different tax consequences. Because of the complexity of tax laws and terms tailored for individual situations, private, noncommerical mortgages involving shared appreciation should always be executed with the counsel of a real estate attorney. Seal of the Internal Revenue Service The Internal Revenue Service (IRS) is the United States government agency that collects taxes and enforces the tax laws. ...


See also


  Results from FactBites:
 
Mortgage - Wikipedia, the free encyclopedia (3846 words)
Since mortgage debt is often the largest debt owed by the debtor, banks and other mortgage lenders run title searches of the real property to make certain that there are no mortgages already registered on the debtor's property which might have higher priority.
At common law, a mortgage was a conveyance of land that on its face was absolute and conveyed a fee simple estate, but which was in fact conditional, and would be of no effect if certain conditions were not met --- usually, but not necessarily, the repayment of a debt to the original landowner.
Hence the word "mortgage," Law French for "dead pledge;" that is, it was absolute in form, and unlike a "live gage", was not conditionally dependent on its repayment solely from raising and selling crops or livestock, or of simply giving the fruits of crops and livestock coming from the land that was mortgaged.
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