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Shared Equity Mortgages
One of the most important personal goals many people have is buying their own homes. In fact, homeownership remains the biggest part of the American Dream, ahead of having a family, having a great job, or even sending a kid to college.
However, for many first-time homebuyers, that dream is all too often out of reach. Sometimes people don’t have enough money to provide for a down payment on a new home, while in other cases issues with debt or credit can make it difficult to qualify for a mortgage.
Fortunately, thanks to innovative new finance and lending products, people now have other choices to consider besides traditional mortgages in the pursuit of their own homes.
One new option that people can choose when they buy a home is a shared equity mortgage. Let’s take a close look at shared equity mortgages so you can find out if this is a good choice for you.
What is a Shared Equity Mortgage?
How do shared equity mortgages work? Shared-equity mortgages are mortgages where the bank or other lender provides a loan to the homebuyer but is also an investor in the property as well.
In this type of homebuying agreement, the buyer sells a percentage of the home’s value to the lender in exchange for a reduction in the overall loan amount.
When the homeowner eventually sells the property, the home’s equity is allocated based on each party’s ownership share.
Similarly, losses on the property during a sale are allocated equally in a shared equity mortgage arrangement as well.
These types of mortgages are also called shared appreciation mortgages.
Shared equity mortgages used to be relatively uncommon in the United States; there were only a handful of lenders who provided them, and the arrangement was often implemented by nonprofits or municipalities seeking to increase opportunities for first time homeowners.
However, the practice is now becoming more popular in the United States and many lenders, including online lending platforms, are now offering shared equity mortgages to prospective homebuyers.
This arrangement is often used to enable homeowners to access their home’s equity in lieu of a home equity loan, too.
How do Shared Equity Mortgages Work?
There are several different types of shared equity mortgages out there; they have different terms and work in several different ways.
In some cases, home buyers do not make any payments to the mortgage lender until they refinance or sell the home.
If for example, a lender issues a buyer a $10,000 loan for a $100,000 house, it may expect a 10 percent appreciation stake at the time of sale.
So, if the house sells for $150,000, the buyer will repay the $10,000 loan, and pay the lender an additional $5,000 for the property’s appreciation.
Since the buyer had no mortgage payments between purchasing the home and selling it, he or she could have easily saved the money to repay the loan and used the additional funds on hand for other priorities as well.
Other shared equity mortgage arrangements work differently. For example, Point, a private shared equity mortgage company, primarily works with people who already own a home.
Point invests $35,000 to $350,000 in the equity you already have in your home, providing a cash payment for the investment directly to the homeowner.
The homeowner then has a 30-year term to repay Point’s investment and appreciation, with no early re[payment penalty. In most cases, buyers will repay Point at the time of sale or by refinancing.
In this case, using a shared equity company to access your home’s equity could help you make home improvements, or focus on other financial priorities.
Pros and Cons of Shared Equity Mortgages
Here are some of the pros and cons of shared equity mortgages you should consider.
- More House. Using a shared equity mortgage will increase your buying power and enable you to buy a more expensive property without raising your monthly payments.
- Shared Risk. If the home you purchase with a shared equity mortgage decreases significantly in value, you won’t have as much of your down payment tied up in the home, since the lender will have invested some portion of its own money in the down payment as well.
- Access Equity. Many shared equity companies allow you to access your home’s equity with little to no up-front fees, so you can use your home’s equity to focus on other financial priorities.
- Limits Wealth Building. A home is often a person’s best personal investment, but a shared equity mortgage will limit your ability to build wealth as your home’s value appreciates, since you will owe a portion of that appreciation to the lender that issued the shared equity mortgage.
- Diminished Control. Depending on the shared equity company or public program you participate it, you could have limited control on how much you sell your home for, or any major changes or improvements you want to make to it.
- Limited Availability. While there are more shared equity companies now than there were a decade ago, access to these companies or to public shared equity arrangements is still limited.
Where Can I get a Shared Equity Mortgage?
Besides Point, there are several companies that now offer shared equity mortgage options for prospective homeowners. Haus is another company many homeowners turn to in order to access their home’s equity.
Noah, Hometap, and Unison are three other companies offering shared equity arrangements as well. All of these companies have very different terms, so they’re worth checking out to determine which program would work best for you. Additionally, it is always worth checking with the city you live in or near to see if they have any public shared equity mortgage programs you might be eligible for as well.
Mortgages For Shared Equity: Parting Thoughts
A shared equity mortgage could give you access to a home you’d otherwise be unable to afford and help put you in a better cash flow position as well. However, there are drawbacks to shared equity arrangements as well. So, talk to a trusted financial advisor today, and find out if a shared equity mortgage would be a good fit for your home buying plans as soon as you can.
Enjoy our shared equity mortgages article?
You may also be interested in Haus Co-Investing Mortgages.