May 30, 2023

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The Benefits of Equity Sharing for Enhancing Affordability

Homeownership represents a significant milestone on the path to financial stability and security. It not only provides a sense of belonging but is also a key tool for wealth creation. However, for many households grappling with the rising costs of living, this aspiration might appear beyond reach. Shared equity mortgages emerge as an innovative solution in this context, paving the way to more accessible homeownership. This article explores the benefits of shared equity mortgages in enhancing affordability, supported by straightforward statistics and examples.

Lowering the Entry Barrier

The entry barrier to homeownership with a traditional mortgage often comes in the form of a hefty down payment — usually around 20% of the home's purchase price. Consider a home priced at $200,000; the required 20% down payment translates to $40,000 — a considerable sum for many households.

In contrast, shared equity mortgages can require much lower down payments, sometimes as low as 5% or less. For the same $200,000 home, this brings the down payment to a more manageable $10,000, making homeownership an achievable aspiration for a wider group of individuals and families.

Reducing Monthly Payments

A key advantage of shared equity mortgages is the potential for lower monthly payments compared to traditional mortgages. For instance, a traditional 30-year mortgage for a $200,000 home (after a $40,000 down payment), with a 3% interest rate, would result in a monthly payment of about $674.

With a shared equity mortgage, monthly payments could be reduced by 20-30%. This brings the monthly payments down to a range of $470 to $540, freeing up as much as $200 each month. For households striving to balance their monthly budget, these savings can make a significant difference, providing more room for other essential expenses or contributions to savings.

Cultivating Stability and Community Integration

Beyond the financial sphere, homeownership brings about an array of social and psychological benefits. Homeownership fosters a sense of stability and certainty, often unmatched by renting. It allows households to establish roots and integrate into a community, positively affecting their overall wellbeing and mental health.

Research indicates that children of homeowners tend to perform better academically and are more likely to graduate from high school. This can partly be attributed to the residential stability homeownership provides, resulting in fewer disruptions to a child's educational journey.

Providing Flexibility for Future Financial Planning

Shared equity mortgages introduce an element of flexibility that can prove beneficial for households navigating their financial future. For instance, if homeowners decide to sell their home, they are not bound to pay off the entire traditional mortgage loan. Instead, they would return the original loan amount plus a share of the home’s appreciation to the lender.

This arrangement can act as a safety net for households whose financial circumstances may evolve, making it a less risky proposition compared to traditional mortgages.

Accumulating Wealth Over Time

Homeownership is a cornerstone of wealth accumulation. According to the Federal Reserve, the median net worth of homeowners far surpasses that of renters. Shared equity mortgages can empower more families to embark on the wealth-building journey that homeownership offers.

While shared equity mortgages involve sharing some of the home's appreciation with the lender, homeowners still benefit from the remaining appreciation. If a $200,000 home appreciates by 3% per year, it would be worth about $268,783 after 10 years. Even after sharing a portion of this appreciation with the lender, homeowners can still witness a substantial growth in home equity.

Conclusion

Shared equity mortgages serve as a compelling alternative to traditional mortgages, offering a viable path to homeownership for a wider segment of society. By reducing initial financial barriers, offering lower monthly payments, enabling wealth accumulation, and fostering stability and future financial flexibility, shared equity mortgages transform the homeownership landscape. By leveraging shared equity mortgages, we can help make the dream of owning a home an attainable aspiration for many more households.

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