The purchase of a home involves a large investment, money that not everyone has available. A down payment of 20 percent or more will have to be made in order to avoid paying private mortgage insurance. Add several fees and closing costs to that and you are looking at an initial investment of tens of thousands of dollars. Borrowing that kind of money from a relative can be extremely difficult. Your family member could invest that money into something that will yield a nice return, so it would be unfair to deprive them of that. One solution would be for the relative or even a friend to become a co-investor in your home.
Shared equity mortgages allow you to find a co-investor that will provide part of the down payment, with the condition that he or she has the right to a percentage of the property’s value. While home prices can increase over time, and both investors can turn a profit, there is always the risk that home values will decrease, and both investors will lose money. Fortunately, real estate is a profitable investment more often than not, so a shared equity mortgage can make more sense than many other investments. By using a shared equity mortgage, parents also have the chance to help their children become home owners without having to dip into their investment funds.
Advantages of Shared Equity Mortgages
The largest advantage of shared equity mortgages is that, depending on everyone’s financial situation, one person can only occupy the home, while the other invests in it. This way, the person occupying the home doesn’t need good credit or money for the down payment, while the investor makes a larger return on his or her investment.
Another benefit is that someone can become a home owner much quicker than it would take if he or she took time to save money for the down payment and closing costs. Of course, the profit will have to be shared with the other investor in the future, so deciding if a shared equity mortgage is right for you depends mostly on your plans.
A third advantage is that both people who have invested in the home have the right to benefit from the real estate ownership tax benefits. When writing the shared equity mortgage agreement, the investor must not be considered a lender, because that would disqualify him from being entitled to tax benefits. Also, the person who will occupy the home must not be considered a tenant in the written agreement. This can be avoided by hiring an attorney to draft the shared equity mortgage agreement.
Disadvantages of Shared Equity Mortgages
The biggest disadvantage is that, if the housing market drops, the investor will lose money. That is a risk that investors take when making any investment, but the real estate industry has proved to be a fairly solid investment over time. Another disadvantage is that sharing equity can become expensive if the two parties involved start disagreeing on things like who pays for the property taxes and insurance. Also, the investors’ credit score can be negatively affected if the mortgage goes into default.
Shared equity loans can be a win-win for both parties, as long as there is a written agreement in place. One of the parties gets to become a home owner, without spending too much on the initial costs of buying a home, while the other party gets to invest their money into something that will most likely generate a profit.