What is a Shared-Appreciation Mortgage (SAM)

A shared appreciation mortgage (SAM) allows the purchaser to pay a given amount of the loan balance to the lender by passing along a portion of the appreciation in the value of the property. In return for this additional compensation, the lender agrees to charge a rate of interest on the loan which is below the prevailing market interest rate. SAMs allow the lender to recoup the balance of the interest charged upon sell of when the property.

BREAKING DOWN Shared-Appreciation Mortgage (SAM)

A shared appreciation mortgage (SAM) differs from a regular mortgage during the resell of the property. With a SAM, the borrower agrees to give a portion of the home's appreciated value to the lender along and the remaining principal balance when the borrower sells the house. With a standard mortgage, the borrower pays the lender the remaining principal balance of the loan, and no more. 

The bank will usually offer a lower interest rate on SAMs. Also, the bank and the borrower will agree upon the percentage amount of appreciated value which will be due on the sale of the property. This agreed upon percentage is known as the contingent interest amount. As an example, if a homeowner finances $500,000 with a shared appreciation mortgage which has a contingent clause of 25% then sells the home later for $600,000, the house appreciated $100,000 With a 25% SAM the homeowner pays the lender $25,000.

SAMs may also include a phased-out appreciation mortgage clause. With this clause, the portion of the original loan that is covered by the shared appreciation clause is usually called the deferred principal on the statement. This phased-out clause means that the borrower pays a percentage of house price appreciation only if they sell within the first few years. A typical loan will give 25% of the value appreciation to the lender if the borrower sells within five years of the modification. To benefit most, a borrower would keep the house for five years, then sell later, because it would allow the borrower to retain all the price appreciation.

Users of Shared Appreciation Mortgages

Shared appreciation mortgages find frequent use with real estate investors and house flippers. Flippers are those investors who purchase and renovate a property in the hopes of turning a profit. These loans also work well in the upward rising real estate market. In some cases, the Internal Revenue Service allows the deduction the amount of gain passed to the lender as interest in the year the property sells. However, this type of home loan often has a time limit on repayment of the balance. Properties not sold by the deadline usually have refinancing of the remaining balance at the prevailing market rate.