With mortgage interest rates creeping up, a home financing plan that shaves 2 percent off the top of a mortgage rate looks very appealing to consumers.
That can be accomplished with a shared appreciation mortgage, a plan that was a hot product a couple of decades ago, but was shelved when the variable rate mortgage took center-stage. Now, the variable rate mortgage is being shelved by an increasing number of lenders and the shared appreciation mortgage (SAM) is becoming popular again.
From an investment perspective, the reviving shared appreciation mortgage is a little like gambling. The homeowner is betting the value of his home will not appreciate in value much over future years. If it does increase significantly, the owner will eventually pay the lender more than he ever saves with the lower interest rate. But for many consumers, it’s a viable option.
The SAM is a fixed-rate mortgage with a term up to 30 years like traditional mortgages. In exchange for a lower interest rate and/or other concessions, you (the homeowner) agree to give up a portion of your property’s future appreciated value. In other words, you share the difference between what it’s worth when you buy the home and what it will be worth when you sell it.
The amount your mortgage rate is reduced depends on how much of your future value appreciation you’re sharing with the lender. Typically, it ranges from 20 to 60 percent of total appreciation.
There are two major benefits of a SAM loan. It allows many families to qualify for a needed home financing loan who would be unable to do so without this special provision. And it saves a substantial amount of money each month due to reduced loan payments. This saved amount can be used for investments or paying for home improvements.
Some homebuyers who consider such a loan come up with the bright idea of taking the loan for a short period then refinancing to save a larger share going to the lender. The lenders cover that problem quite effectively by building in stiff prepayment penalties if the loan is terminated early.
Penalties are often imposed if you pay more than 20 percent of the outstanding balance at any point during the first three years of the loan.
Like any plan, SAMs have their negative factors. The first concern is the money you’ll have to give the lender when the property is sold or the loan refinanced. If the value went up substantially, that shared amount could be large. And even though real estate is cyclical, home values generally appreciate.
Also if you’re considering such a loan, check with your accountant regarding the tax aspects of such a loan. That has not been clearly defined by the IRS. Also check how the loan would be handled in your estate in the event of your death.
It should be noted that any improvement you make in the home during the term of a SAM loan could benefit the lender. The increased value created by the improvement would normally be included in calculating the shared amount received by the lender.
However, if you’re planning a major improvement when buying the property, such as a room addition or swimming pool, that project could be exempted from the calculation. This should be negotiated with the lender at the time the SAM loan is structured.
In addition to reduced interest rates offered by SAM lenders, there are a number of variations on this concept offered by local governmental entities. These mortgage assistance programs are offered by cities and counties.
For example, the city of Burbank, California, offers a 30-year second mortgage loan to families with limited incomes. It carries zero interest and no payments for the first five years. Then the second mortgage payments begin at 5 percent interest.
Instead of an interest rate concession on the first mortgage, it offers a concession on a second mortgage. In exchange for the concession, the plan sponsor takes a share of the home’s appreciated value.
This plan is limited to families, with four or more people, making no more than $62,500 per year. Other community plans have varying terms and requirements.
For more information about SAM home financing loans, ask your local mortgage lenders, and check with a local housing authority office.
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Another non-traditional mortgage plan that is attracting some renewed interest in today’s market is the interest-only loan. As the name implies, you pay only interest payments nothing on the principal. It’s appealing because the payments are lower, and there is no sharing of appreciated value when the home is sold. But many financial planners discourage homebuyers from using such a plan. They consider it a high-risk loan for many homebuyers. The fact that the loans principal never goes down is the primary problem. This limits your equity build-up to the increasing value of the property generated from inflation nothing from loan reduction. To maximize the investment benefits of homeownership, it’s usually better to go with a traditional amortized mortgage loan.
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Home inspection services are becoming a boom industry. One recent survey indicates that up to 77 percent of home sale transactions now involve services of a professional inspector, according to Michael Casey, president of the American Society of Home Inspectors (ASHI).
In some parts of the country, better than 90 percent of home sales now include an inspection, said David Hetzel, president of the Home Inspection Institute of America (HIIA). That’s up from 45 to 55 percent just a few years ago.
It’s not really surprising that a growing proportion of home sales include a home inspection before or during the closing process. Buyers obviously want to know as much as possible about the condition of a home before purchasing and finance it. Sellers and brokers want to avoid after-sale hassles and potential legal problems in today’s litigation-crazed environment.
The rising cost of hiring an inspector is a consideration. Typically, it now ranges from $250 to $300. And after shelling out that fee, don’t expect a total inspection.
Inspectors don’t cut holes in walls to inspect studdings or sources of moisture. They don’t dismantle other portions of the home’s construction to reveal otherwise concealed elements. They inspect and evaluate only those parts of the home that are readily visible.
Normally, that’s clearly spelled out in the inspection contract. That’s certainly a reasonable and needed limitation. But it also limits the scope of the inspection and opens the door to after-sale problems not foreseen or reported by the inspector.
It should be noted, however, that those problems emanating from unseen portions of the home are rare. And most people consider the cost of a visual inspection to be justified by its benefits, as shown by the increasing number of inspection contracts being sold.
Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers. He also writes freelance features.