Sally just found the house of her dreams, but unfortunately, it’s a little out of her price range. Luckily, her grandpa has a pretty sweet offer for her: he’ll help her buy the house if he can retain some of the property’s equity in return. In other words, he’s offering her a shared equity mortgage option.
A “shared equity mortgage” is a mortgage secured by two people: the owner-investor (Grandpa) and the owner-occupant (Sally). The owner-investor essentially loans the owner-occupant they need to buy the house, and then they own that percent of equity in the property. Sometimes the owner-investor is an entity like a bank, but sometimes, like in our example, it’s an individual private investor.
Let’s say Sally’s dream house costs $500,000. She can only get approved for a $375,000 loan, so Grandpa is loaning her the additional $125,000. Since that’s 25% of the overall purchase price, Grandpa now owns 25% of the house’s equity. Know what else is in it for Grandpa? Many states require the owner-occupant to pay the owner-investor rent equal to his portion of the equity, which means he should be getting a nice little check from Sally every month. Also, he can claim a few tax benefits for his part in all of this, like mortgage interest deductions and property depreciation. And when Sally sells the house, he gets 25% of the profits…or has to shoulder 25% of the losses, depending on how the market is. Either way, Sally gets the house she wants, Grandpa gets to partake in a nice little investment opportunity, and the two of them get to bond over the joys of joint homeownership.
Related or Semi-related Video
Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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