From the sounds of it the loan would work kind of like a reverse mortgage where the lender would make a loan collateralized by equity in a home.  But instead of collecting interest in the form of monthly payments or through negative amortization (interest accrued that is added to the loan amount) the lender would instead take a cut of the equity in the home when it is sold in the future.

I’m pretty skeptical of this one.  On the surface it sounds like another way for lenders to appeal to undisciplined consumers who like the idea of not having monthly payments much like the negative amortization loans did during 2004-2007.

There are legitimate applications for this type of loan but I would advise that consumers consult with a financial professional they can trust before signing the dotted line.

Additional links-

-WSJ.com article on “shared-appreciation” loans

HELOC’s
A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.

HELOC’s have extremely flexible terms and is an excellent financial tool for homeowner’s with a large equity position in their home. HELOC’s typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish. Due to the flexible nature of the draws HELOC’s have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOC’s can vary from -0%-3.00%. The margin is determined by the borrower’s credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOC’s do have an annual service fee charged for the maintenance of the account.

Fixed Rate Home Equity Loan
The most common fixed rate home equity loan is a 30/15 balloon program. With this loan a borrower will take out a sum of money and make payments based on a 30-year amortization at a fixed rate. However, at the end of 15 years if the borrower still had this loan they would be forced to pay-off or refinance the remaining balance. Typically these loans do not carry any penalty to prepay them early.

When would a 2nd mortgage make sense?
We originate 2nd mortgages in many different cases. 2nd mortgages are used as combination loans in purchase transactions in order to allow the client to avoid paying for costly private mortgage insurance. 2nd mortgages are also used when a client needs to borrow a small sum of money for a short period of time to satisfy an unbudgeted obligation. Since 2nd mortgages are relatively inexpensive to originate often times they can be more cost effective than refinancing a larger primary mortgage.

HELOCʼs have extremely flexible terms and is an excellent financial tool for homeownerʼs with a large equity position in their home. HELOCʼs typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish.

Due to the flexible nature of the draws HELOCʼs have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOCʼs can vary from -.50%-3.00%.

The margin is determined by the borrowerʼs credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOCʼs do have an annual service fee charged for the maintenance of the account.