Shared Equity Mortgage

  

Categories: Mortgage, Real Estate

Sally just found the house of her dreams, but unfortunately, it’s a little out of her price range. Luckily, her grandpa has a pretty sweet offer for her: he’ll help her buy the house if he can retain some of the property’s equity in return. In other words, he’s offering her a shared equity mortgage option.

A “shared equity mortgage” is a mortgage secured by two people: the owner-investor (Grandpa) and the owner-occupant (Sally). The owner-investor essentially loans the owner-occupant they need to buy the house, and then they own that percent of equity in the property. Sometimes the owner-investor is an entity like a bank, but sometimes, like in our example, it’s an individual private investor.

Let’s say Sally’s dream house costs $500,000. She can only get approved for a $375,000 loan, so Grandpa is loaning her the additional $125,000. Since that’s 25% of the overall purchase price, Grandpa now owns 25% of the house’s equity. Know what else is in it for Grandpa? Many states require the owner-occupant to pay the owner-investor rent equal to his portion of the equity, which means he should be getting a nice little check from Sally every month. Also, he can claim a few tax benefits for his part in all of this, like mortgage interest deductions and property depreciation. And when Sally sells the house, he gets 25% of the profits…or has to shoulder 25% of the losses, depending on how the market is. Either way, Sally gets the house she wants, Grandpa gets to partake in a nice little investment opportunity, and the two of them get to bond over the joys of joint homeownership.

Related or Semi-related Video

Finance: What is Interest Only Mortgage?17 Views

00:00

Finance allah shmoop what is an interest only mortgage Well

00:07

simply put it's when you only pay the rent on

00:10

the dough you borrowed you don't pay down the principal

00:14

you owe like if you have a three hundred thousand

00:16

dollars mortgage at six percent interest you're paying eighteen grand

00:19

a year to rent that money in six percent times

00:22

three hundred rands eighteen grand a year But the principal

00:25

you borrowed is likely due in thirty years So in

00:28

theory anyway if it were a normal mortgage you'd want

00:32

to pay down the principal little bit a month as

00:34

you go along like averaging ten grand a year in

00:37

principle pay down over thirty years That's times ten grand

00:41

right three hundred grand their total owning your home at

00:44

the end yeah yeah priceless that's what holmes work So

00:47

why would you want an interest only mortgage Well for

00:51

one thing the monthly payments or less so maybe you

00:54

could afford morehouse If on a thirty year three hundred

00:57

thousand dollar loan at six percent you're paying interest only

01:00

while you're writing a check each month for eighteen thousand

01:03

divided by twelve or fifteen hundred bucks maybe that's all

01:06

You can afford well the extra five hundred bucks arm

01:09

or you'd right toe pay down your principles Just not

01:12

something you can really do right now Maybe after three

01:15

years of scrimping and saving well you'll be able to

01:18

start paying down that principal reducing risk and making life

01:21

easier all the way around But right now you can't

01:24

afford it so the only thing you can do is

01:26

do the interest only dance Well the other reason you

01:28

might want an interest only mortgages that interest costs are

01:31

tax deductible Principal pay down costs are not so if

01:37

in a given mortgage payment of say eighteen hundred bucks

01:40

a month where three hundred of it is principal pay

01:43

down and fifteen hundred of it is interest well on

01:47

ly the fifteen hundred is tax deductible That three hundred

01:51

of pay down is not And if you're a forty

01:53

percent taxpayer the government is essentially picking up the tax

01:58

savings on the fifteen hundred times a forty percent at

02:02

six hundred dollars in interest You're paying such that they

02:05

quote feel unquote like the fifteen hundred is really only

02:10

about nine hundred a month in cost to you the

02:13

three hundred bucks and principal paydown feels like a full

02:16

three hundred dollars So some people seeking tio optimize their

02:19

tax deductions live in the world of interest only mortgages

02:23

and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it

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