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The Nation's Housing

Program Shares Appreciation With the Lender

October 15, 2000|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — If you had the chance, would you take a mortgage rate two percentage points below the prevailing rate in the current market, fixed for 15 or 30 years?

Think of it: You could refinance your current 8% home loan down to 6%. You could buy a bigger house than you can afford now because the monthly payments would be significantly lower. You could pay off all your current consumer debts and replace them with a single discount-rate mortgage.

Sound intriguing? If you think so, get ready for an option like this on the menu of lenders across the country. That's because more than 1,000 mortgage companies are teaming up with Wall Street to introduce the first nationwide "shared appreciation mortgage" program.

Bear Stearns & Co. Inc., the New York investment banker, plans to buy large numbers of the new loans from local lenders through an arrangement with National Commerce Bank Services Inc. of Memphis, Tenn. The first loan--30 years at 6 1/8%--closed Oct. 4, and sponsors believe that billions of dollars more are possible in the next few years.

"Shared appreciation" is not a novel concept. Local lenders have experimented with the idea since the 1970s. But there never has been a Wall Street-funded, nationally uniform shared appreciation mortgage for consumers until now.

The core concept is simple: In exchange for a reduction on your interest rate, you agree to give the lender a stake in any appreciation the house accrues because of inflation during the term of the loan. In the new program, borrowers get from one to two percentage points off current market rates and share from 30% to 60% of future appreciation.

The program funds mortgages with as little as 5% down payments. Maximum loan amounts go as high as $650,000. Relatively good credit--a Fair, Isaac credit score of 660 or above--is required.

But does sharing future appreciation really make sense for home buyers and owners? Is two percentage points off your mortgage rate worth giving up half of your future appreciation?

The answer to both questions isn't totally satisfying: It depends. It depends on how much your house appreciates in the years ahead. It depends on where interest rates go in the future. And probably most important of all: It depends on whether you as a borrower read the detailed disclosures that loan officers are supposed to provide you as part of the new program.

On the plus side of the concept: You are guaranteed to pay less month-to-month as long as you keep the mortgage. On a $250,000 mortgage, you'd pay $1,835 a month in principal and interest at 8%. At 6%, you'd pay $1,500. That's a savings of $335 every month, $4,020 a year. No matter what percentage of appreciation you agreed to share, you'd owe nothing additional when you paid off the loan if your home value remained flat or declined.

But what if, after five years, your house appreciated by $40,000 and you had agreed to share 50%? At payoff, you'd owe the lender $20,000--$4,000 a year on average--and your interest savings wouldn't look so impressive. Now imagine a more extreme result. Your house is in a boom market, and its value soars by $100,000 over the term of the loan. At payoff, you'd owe half of that, $50,000, plus the remaining unpaid principal.

Other points to consider:

* "Appreciation" calculations.

The new program makes extensive use of appraisers--at application, any time you make a substantial home improvement and at payoff--to determine how much the house appreciated. You pay for the appraisals and generally get to choose from a roster of licensed appraisers used by the lender. If you try to pull a fast one, such as selling the house to your brother-in-law for much less than it's worth, you'll probably get flagged.

* Prepayment penalties.

To prevent borrowers from using the SAM as a cut-rate short-term loan, the program calls for substantial prepayment charges during the first three years.

* Tax issues.

With a lower interest rate, you'd normally expect to write off less on interest payments at tax time. But in reporting your interest paid to the IRS, the SAM program gives you credit for the appreciation you're likely to share as "contingent interest." The effect will be to report your annual interest at a rate closer to the rate you would have paid on a regular mortgage. But will the IRS accept those higher-rate estimates?

Talk to your tax advisor. And don't jump into a SAM without a thorough professional review of these and other issues. For more information, call National Commerce Bank Services at (888) 317-0858.

Distributed by the Washington Post Writers Group.

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