A Shared Appreciation Mortgage “SAM” is a type of loan arrangement originally developed in the 1980’s by the lending industry to help low-income buyers purchase homes when interest rates were high and financing was harder to get. It works by allowing a lender share in both the risk and reward of the investment in a property.

To understand how a “SAM” loan works, you must first understand how the mortgage process works. When you take out a conventional home loan, you sign two documents at closing: a promissory note, which details the terms of the loan, and a security document for the promissory note, which is either a mortgage or deed of trust. The security document is what the lender uses to foreclose if you stop making payments. With a conventional home loan, the lender charges an interest rate on the money, and you agree to make monthly payments over some extended period of time, typically 30 years.

A “SAM” loan is a form of promissory note where you agree to an interest rate that is lower than the “going” rate, but you also agree to give the lender a share of any appreciation in your home that might occur from the date you sign the loan until the date you sell or refinance the home. This percent of shared appreciation typically ranges from 30 to 50 percent. The higher the appreciation percentage you give the lender, the lower the interest rate that will be charged on your promissory note.

For example, if interest rates are currently 6 percent, you could take out a “SAM” loan with an interest rate of 5 percent, but in exchange for the lower rate, you agree to give the lender 50 percent of the home appreciation from the date you purchased it until the date you sold it. If you purchased the home for $100,000, and six years later, you sell it for $140,000, your appreciation would be $40,000. At closing, you would give the lender 50 percent ($20,000) of the gain.

One argument against this type of arrangement is that borrowers are giving up too much in exchange for the lower interest rate. On the other side, the borrower might not have been able to qualify at all, if it weren’t for the lower rate.

“SAM” arrangements became almost non-existent with the increased use of adjustable rate mortgages, because adjustable rates gave borrowers a lower, initial lower rate without having to give up a percentage of their future home appreciation.

Other Considerations of SAM Mortgages:

Decline in Value

In some instances, a property might decline in value instead of go up. With a “SAM” loan, the borrower isn’t liable for any more than the original loan balance. In other words, they don’t “share” in a decline in value.

Prepayment Penalties

Some borrowers tried to circumvent the shared appreciation aspect of the mortgage by refinancing the SAM mortgage with a traditional mortgage. To overcome this, most SAM mortgages contained pre-payment provisions that provided penalties that had to be paid by the borrowers such as six months of interest in the case where a borrower paid the loan off early.

For example, if the monthly interest on a “SAM” loan was $1,000, if the loan were paid off early, the borrower would have to pay an additional $6,000 at the close of the refinance.

Costs

With “SAM” loans, since lenders participate in the appreciation of the property they loan on, their fees to process the loan, such as origination fees or “points” are usually lower than if they were making a conventional loan without shared appreciation. In essence, the lender makes money both from the loan fees and the shared appreciation of the property.

Timing

Timing plays an important role in the decision to use a “SAM” loan instead of a traditional home loan. For example, if housing prices are expected to remain stable, a “SAM” loan might be a good choice for you because the lower interest rates wouldn’t be offset by you having to concede too much appreciation to the lender. Also, if interest rates have risen substantially, you might have an easier time qualifying for a SAM loan than a traditional mortgage.