What Is a Shared Equity Mortgage?

It may be a good option for low-income homebuyers

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A shared equity mortgage is a type of home financing program designed to make homeownership more affordable. These mortgages usually assist buyers with the upfront costs of buying a home, such as the down payment, and are generally offered by nonprofit organizations, municipalities, or private investors.

Because shared equity mortgages often contribute to the down payment on a buyer’s home purchase, these programs also help lower the loan’s balance and, thus, the monthly mortgage payments, too.

How Does a Shared Equity Mortgage Work?

Shared equity mortgages are also sometimes called “partnership mortgages,” because the homebuyer has what amounts to a silent partner in their home purchase (and eventual sale).

Here’s how they work:

  1. The organization, investor, or municipality lends a buyer all or some of the required closing costs, down payment, or a portion of the purchase price.
  2. In exchange for this money, the buyer agrees to share in the eventual sales profits of the property. This is usually a percentage of the sales price or appraised value of the home.
  3. The buyer typically won’t owe the lender any payments until they refinance the loan or sells the house. They may be required to live in the home a certain number of years, though. 

Some shared equity mortgage programs also put a cap on what you can sell your property for, or even limit to whom you can sell it to (in terms of the buyer’s income). This is designed to ensure housing in certain areas remains affordable to local residents.

These differ from shared appreciation mortgages, in which, similarly to traditional mortgages, only the homebuyer agrees to pay off the loan, as well as a percentage of his or her home’s appreciation value upon reselling the property. In exchange for that stake in the appreciation, the lender offers a lower interest rate on the loan. 

Pros and Cons of Shared Equity Mortgages 

There are many benefits to shared equity mortgages, especially for first-time buyers or those struggling to get their foot in the door of homeownership.

Pros
  • Helps homebuyers with little savings afford a house

  • May cover down payment and closing costs entirely

  • Can increase housing affordability in areas where it’s needed

  • May lower local delinquency and foreclosure rates

  • Can help buyers build equity to use toward future home purchases

Cons
  • Homeowner gets less of the profits when home is sold

  • May limit homeowner in what they can list the home for or who they can sell it to

  • Limited availability

For one, they can significantly reduce the costs of buying a home—sometimes eliminating the down payment and closing costs entirely. Shared equity mortgages can also lower one’s monthly payments and help ensure housing in a particular geographic area is more affordable on the whole. 

A study from the Urban Institute also shows these mortgages help buyers build equity to purchase higher-priced homes later on. Additionally, if the down payment provided by the investor is high enough, shared equity programs can also help buyers avoid the costs of private mortgage insurance (PMI).

There may be many benefits, but remember that these programs limit how much you can make off the sale of your home, and they may even dictate to whom you can sell the home.

Shared equity programs aren’t available everywhere, and options may vary greatly based on your location.

Private Shared Equity Mortgage Programs

In addition to the shared equity mortgage programs offered by municipalities, nonprofits, and other similar organizations, there are also shared equity products emerging from private companies as well. 

Some of these options include Haus, Noah, Point, Unison, and OWN Home Finance. Some of these companies will match a portion of every dollar you put toward the upfront costs of your home, while others share in certain parts of your equity (some even after you’re in the home).

Each organization will take a slightly different approach, but they all follow the general shared equity model, reducing the costs of buying a home either upfront or via lower monthly payments.  

Is a Shared Equity Mortgage Right for You?

Shared equity mortgages may be a good option if you’re a first-time homebuyer, have a low income, or just don’t have much saved up for a down payment or closing costs. They do come with a long-term cost, though, so make sure you weigh the full consequences of sharing your home’s equity with an outside investor or party.

To get one, you can simply apply online via the organization’s website. You’ll need to fill out a form to see if you qualify for the shared equity mortgage program first. As with other mortgage lenders, you’ll need to provide personal information. If you do qualify, you may need to pay several fees, such as origination or appraisal fees, too. 

Remember: Home equity can be a valuable financial tool later in life, allowing you quick access to cash or money to support home improvements, retirement, or other goals. Be sure to take into account the full picture before opting for a shared equity mortgage.

Article Sources

  1. Bright MLS Homes. "Mortgage Information." Accessed April 7, 2020.

  2. Fannie Mae. "Shared Equity and Homebuyer Assistance Programs." Accessed April 7, 2020.

  3. Urban Institute. "Sharing Equity with Future Generations: An Evaluation of Long-Term Affordable Homeownership Programs in the USA." Accessed April 7, 2020.