share-appreciation mortgages (sams), Financial Management

High interest rates in the early 1980s brought about this innovative mortgage arrangement. SAMs use inflation as a way of paying for the property. The lender agrees to charge a very low level of interest on the funds and in turn, the borrower agrees to share a part of the increase in the property value with the lender when the loan matures, or when the property is sold or at some other specified time.

When SAMs came into existence, one-third participation was popular; the lender would agree to decrease the interest charged by about a third of the prevailing rate in return for one third of the appreciation in the property value.

For the borrower, SAMs are attractive as he/she can purchase an otherwise unaffordable home. The lender has the potentially lucrative equity kicker, depending on the rate of inflation. However, the disadvantage with SAMs is that they are not standardized and hence cannot be pooled, packaged into units and sold as securities.

Posted Date: 9/8/2012 7:42:05 AM | Location : United States







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