A YOUNG couple in Phoenix spotted a house they wanted to buy. The price: $98,500. They figured that after putting 20% down they could get a $78,800 mortgage at interest rates then at 131/2%. But monthly payments would have come to $950 a month, and that
was more than the couple could afford. Their solution was to go to a mortgage company that offered them what is known as a sharedappreciation mortgage.
This type of loan lowered their payments by one third. In return the buyers promised to give the lender one third of the profit they make whenever they sell the house. Because housing values have risen so dramatically in the past, offering to share your appreciation might sound like a pact with the devil. But by agreeing to share profits, the Phoenix couple was able to buy as their first house one that otherwise might have taken years to acquire. And when they do sell, even though they will have to give the lender a third of the profit, they still stand to come out ahead. That's because their two thirds share will probably amount to just as much as the full profit on a cheaper property.
Generally, these shared appreciation mortgages help not only first time buyers, but also elderly buyers who cannot afford to make big payments and who expect to own their houses for the rest of their lives.
If you consider a shared appreciation mortgage, be aware of the risks. Under some agreements, a lender can collect his share of the appreciation after 10 years, even if the homeowner has not sold, If the homeowner does not have the cash to pay, he will have to borrow and perhaps take out a new mortgage. This could zap him with exploding monthly payments.
The shared mortgage is also a poor choice for a do it yourselfer. If you make home improvements yourself, the value that you add to your house is shared with the lender.
