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A Quick Guide to Shared Equity Mortgages

Short on funds and looking for a home?  Looking for an investment that could yield nice returns?  A shared equity mortgage may be the arrangement for you.  Before you decide to jump into this type of partnership, you should know exactly what the loan is as well as the risks involved.  Also, the term “lender” is used throughout this article.  The “lender” may not necessarily be the investor in this partnership.  Independent investors can be a partner.

What is a Shared Equity Mortgage?

A shared equity mortgage is an arrangement in which the lender and borrower become partners.  The borrower still lives in the home just like a normal mortgage agreement, but the lender also invests a certain amount of money into the loan.  This means the lender owns a portion of the equity in the home (when equity is available).  When the home sells, the lender gets a portion of the profits as well.

How Is This Beneficial for the Borrower?

As previously stated, the lender invests money to cover a portion of the loan for the home.  This means the borrower is only responsible for the remainder of the loan.  For example, say the purchase price of the home is $200,000 and the lender invests $50,000 into the loan.  The borrower is then only responsible for $150,000 or (75%) of the loan.  A monthly payment on $150,000 (let’s say a 30-year mortgage in this example) is less than a monthly payment on a $200,000.  Another benefit for the borrower is that the lender’s investment can be used as the down payment.  If the down payment is large enough, you can avoid paying private mortgage insurance (PMI).

What Are the Drawbacks of Shared Equity Mortgage?

Of course, there are a number of potential downsides.  Sticking with the same scenario, if a lender invests 25% of the total loan amount, they are entitled to 25% of the profit when the home sells.  Other drawbacks include:

  • A mandatory 20% down payment on the home.
  • You cannot take out a second mortgage on the home.
  • If the investor is not the same as the lender, you could be required to pay double mortgage fees.
  • If you want out of the arrangement, you must pay the lender and investor an amount equal to their investment.

As this arrangement is not typical, you may have questions and require guidance to get through the mortgage process.  You may require the services of a knowledgeable real estate attorney in Florida to make sure you know what you are signing up for.  Elias Dsouza of Dsouza and Strachan Lawgroup group in Plantation, Florida has the knowledge and experience to protect you from avoidable mistakes in your journey toward home ownership.

 

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