Homeownership is an important part of the American Dream, and because of this, there are all kinds of creative ways to get you into a home of your own. Silent second shared equity financing is one of these. It’s a program offered by a government entity or a non-profit agency to assist low-income families buy a home they couldn’t otherwise afford. There are income limitations as well as other restrictions, but it can mean the realization of the dream of homeownership if you qualify.
The “Silent Second” Part
A “silent second” is a second mortgage -- a loan you take out in addition to your first mortgage. The “silent” part means that you don’t have to make monthly payments on it and in many cases, it doesn’t even accrue interest for up to five years. The loan does have to be paid back, but not until you sell or refinance your house. But wait; there’s a catch: The lender is entitled to share in the appreciation of your house’s value.
Let’s say that you want to buy a house that costs $250,000 and you need $50,000 for the down payment, which is 20 percent of the price of the house. You take out a $200,000 first mortgage at 4.5 percent interest and a silent second shared equity loan gives you the remaining $50,000. You pay the first mortgage monthly payments (about $1,000 per month) but you don’t have to make any monthly payments on the silent second mortgage. So, you are able to buy a home that was previously out of reach. Life is good!
The “Shared Equity” Part
Five years go by and you have a couple kids and it’s time to get a bigger house. The good news is that your house has gone up in value! It’s appreciated $50,000. Now it’s worth $300,000. Now you must pay back your silent second shared equity loan of $50,000, plus 20 percent of the appreciation (because $50,000 is 20 percent of the value of the house when you bought it), or $10,000, for a total of $60,000. After five years, the balance on your loan is about $180,000. So, the final breakdown looks like this: You sell your house for $300,000; you pay off the first mortgage for $180,000, which brings you down to $120,000; then you pay your silent second equity partner $60,000, which leaves you with $60,000. Not bad, especially since you wouldn’t have been able to get into the house in the first place without it.
This kind of government program is not available in very many communities. There are private share equity mortgages, or SEMs, but their terms are not nearly as borrower-friendly. Loan amounts are between 8 percent and 16 percent of the value of the home, while the payback percentage of appreciation can be anywhere between 50 percent and 100 percent -- and you must remain in your home for 10 years. Even then, there could be age restrictions requiring borrowers to be between 55 and 85 years of age. The upside, if you can call it that, is that if your home doesn’t appreciate, you owe nothing.
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