- Office of Consumer Affairs and Business Regulation
- Division of Banks
The Office of Consumer Affairs and Business Regulation and the Division of Banks issue the following consumer advisory for homeowners and homebuyers who are considering a type of financing referred to as a “shared appreciation product.” Shared appreciation products bear some similarities to both home equity loans and reverse mortgages, but have very critical differences.
What is a Shared Appreciation Product?
Shared appreciation products, also referred to as shared equity products, provide homeowners or homebuyers with a specified amount of money up front in exchange for the right to acquire a percentage ownership interest in the property and its future appreciation.
Two types of these products have emerged; one allows homeowners to access equity in their homes, and the other provides prospective buyers- often first-time buyers- with a portion of the required down payment. In contrast to a conventional loan, there are no monthly payments and interest is not added to the balance owed each month. However, the shared appreciation product mirrors a traditional loan in that the company’s investment is secured by a mortgage on the property and a failure to pay the amounts owed at the end of the term could trigger a sale or foreclosure of the property.
How to Make an Informed Decision
The Office of Consumer Affairs and Division of Banks therefore recommend the following to consumers contemplating this product:
- Get independent legal and financial advice before signing any documents. These are not typical mortgage products, and the documents are very complicated
- Know your options. Obtaining a traditional home equity loan or line of credit, refinancing an existing loan with a cash-out option, or making a smaller down payment on a home purchase usually are [or may be] viable alternatives to shared appreciation products. Discuss your options with trusted family members, friends, or professional advisors.
- Review the terms and conditions carefully. Be sure you understand the terms, any associated fees, and the consequences of entering into this type of arrangement.
- Understand the possible scenarios for repayment. What could your property be worth in the future, 5 or 10 years from now? What is your estimate of the equity value that you would be giving up? The company may initially provide you with an amount equal to five per cent of the property value in exchange for the right to purchase a larger percentage interest in the property. At the time you sell or at the end of the loan term, however, your home’s value will have likely appreciated and in that case you will owe the company much more than you received.
- Determine your intentions for remaining in your home. Assuming your property value has not decreased significantly at the end of the term (usually between 10 and 30 years), if you do not want to sell your home to repay the company at this time, the repayment amount is still due and must be made in order for you to remain in your home. Do not accept funds in an amount that exceeds what you are able to pay off at the end of the term if there is any possibility that you would like to remain in your home at the end of the term. Through your shared appreciation agreement, the company has acquired rights to a percentage interest in your property. If you default or do not repay the investment in addition to the company’s share in the appreciation when it is due, the company could sell your property or foreclose on the property.
Need Additional Help?
Consumers with questions about shared appreciation products, mortgage lenders, brokers and originators, or foreclosure prevention can contact the Division of Banks’ Consumer Assistance Unit.
The Baker-Polito Administration’s Office of Consumer Affairs and Business Regulation along with its five agencies work together to achieve two goals: to protect and empower consumers through advocacy and education, and to ensure a fair playing field for all Massachusetts businesses. Follow the Office at its blog, on Facebook, and on Twitter @Mass Consumer.