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Because of the shared appreciation feature, monthly payments in this plan are lower than in many other plans. However, you may be liable for the dollar amount of the property's appreciation even if you do not wish to sell the property at the agreed-upon date. Unless you have the cash available, this could force an early sale of the property. Also, if property values do not increase as anticipated, you may still be liable for an additional amount of interest.
There are many variations of this idea, called shared equity plans. Some are offered by lending institutions and others by individuals. For example, suppose you've found a home for $100,000 in a neighborhood where property values are rising. The local savings and loan is charging 12% on home mortgages; assuming you paid $20,000 down and chose a 30-year term, your monthly payments would be $822.89, or about twice what you can afford. But a friend offers to help. Your friend will pay half of each monthly payment, or $420, for 5 years. At the end of that time, you both assume the house will be worth at least $125,000. You can sell it, and your friend can recover his or her share of the monthly payments to date plus half of the appreciation, or $12,500, for a total of $37,700. Or, you can pay your friend that same sum of money and gain increased equity in the house.
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Another variation may give your partner tax
advantages during the first years of the mortgage, after which the partnership
is dissolved. (You can buy out your partner or find a new one.) Your partner
helps make the purchase possible by putting up a sizable down payment and
or helping make the monthly payments. In return, your partner may be able
to deduct a certain amount from his or her taxable income. Before proceeding
with this type of plan, check with the Internal Revenue Service to determine
the exact requirements. Shared appreciation and shared equity mortgages were partly inspired by rising interest rates and partly by the notion that housing values would continue to grow over the years to come. If property values fall, these plans may not be available.
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