Is this thing of the past, or is it a thing of the future, oh grand mystic exalted keeper of the cash ?
This was hailed as a "creative" financing technique once upon a healthy economic climate.
We're talking about the coveted "Shared Appreciation Mortgage", more affectionately known as 'SAM".
This remarkable tool is said to have been used to lower even a normal interest rate for a borrower.
The sidebar to the deal is that the lender that gives the buyer this lower than normal interest rate also becomes entitled to a share of the profit when the me'nage is disposed of.
Here's how it pans out :
Under usual conditions, when a mortgage is applied for, the borrower is facing the usual principal and interest at whatever the market rates happen to be at the time. But when the time comes to sell the digs all of the money made from the sale of the house is money in the buyer's (now the seller's) pocket.
But the other side of the coin is that when the SAM way of financing is applied the buyer/borrower becomes eligible for a less than usual interest rate.
Now here's an example of this "creative" way to finance :
Let's say that the going interest rate is 7.5%.
The lender's not going to charge the borrower that 7.5% rate, but agrees to give the buyer an interest rate of 6.5% instead. And why, pray tell, would the lender lower the prevailing rate a whole point ? Well, it's none other than the fact that the buyer has agreed to share the profits with the seller, the lender or both when the property is sold. Isn't that 'creative' ?
Or is it unethical ?
Lets look at the difference in the financing options with this 'creative form of financing.
A 200 thousand dollar loan for thirty years at 7.5% requires a monthly PI of $1398.43.
A 200 thousand dollar loan for thirty years at 6.5% requires a monthly PI of $1264.14.
That's a walloping 134 dollars a month difference.
Well, these types of mortgage are said to have been created to be paid off in a relatively short amount of time, say ten years, for example. When the time is up, the borrower is supposed to either refinance or sell the property and pay off the 'SAM', with the original lender on the 'SAM' sharing the profit.
But does the lender share any loss ?
How about it pros ? What are your thoughts about old 'SAM' ? Has RESPA been compromised ?