Shared-equity homeownership explained
This article is for educational purposes only. JPMorgan Chase Bank, N.A., does not offer shared-equity ownership. Any information described in this article may vary by lender.
Quick insights
- Shared-equity homeownership involves multiple parties sharing ownership of a property. Usually, this means an investor or group pays some of the down payment or purchase price in exchange for a part of the property's value.
- This model may make homeownership more accessible to aspiring homeowners by reducing the financial burden of a large down payment.
- When you sell a home with a shared equity agreement, you split the proceeds from the sale with your shared equity partner based on the contract terms.
Shared-equity homeownership is an alternative model that may seem appealing once you understand how it works. Homeownership could be more accessible to those who are hesitant about traditional aspects of the process like high down payments and standard lending criteria.
What is shared-equity homeownership?
Shared-equity homeownership is a type of homeownership where the homeowner purchases a portion of the property, and an investor or government entity provides the remaining funds. The homeowner and the investor share the equity in the property, hence the name shared-equity homeownership.
How shared-equity homeownership works
In a shared-equity homeownership program, the homeowner typically purchases a percentage of the property and the investor or government entity provides the remaining percentage. The investor or government group, which could be a housing group, local government or a private investor, owns the rest of the property. The investor’s share of the property is usually based on how much money they give.
Depending on the deal, the homeowner might pay a lower mortgage and down payment than if they used a more conventional mortgage loan. The homeowner must still pay the mortgage on their part of the property. The investor or government may also get a part of the property's increase in value when it's sold; this will vary based on your contract terms.
Example scenario
Let's say you're buying a $300,000 home. You contribute $60,000 (20% of the purchase price), and a shared-equity program provides $30,000 (10% of the purchase price). You secure a mortgage for the remaining $210,000.
- Your ownership stake: 80% ($240,000 total equity contribution: $60,000 from you + $180,000 mortgage)
- Shared-equity program stake: 20% ($60,000 contribution)
This arrangement can make homeownership more affordable for you by reducing the amount you need for a down payment. When you decide to sell the property, the shared-equity program will receive 20% of the property's appreciation (or depreciation) in value. You'd benefit from 80% of the appreciation (or bear 80% of the depreciation).
For instance, if the property appreciated to $400,000, the shared-equity program would receive 20% of the $100,000 gain ($20,000), and you'd receive 80% ($80,000).
Comparing shared-equity homeownership to other models
To understand the value of shared-equity homeownership, let's compare it to a few other models.
Rent-to-own models
Rent-to-own models allow renters to rent a property with the option to buy it in the future. While this model can be beneficial for some, it often comes with higher costs and less control over the property.
Lease-to-own options
Lease-to-own options allow renters to lease a property with the option to buy it in the future. This model can be similar to rent-to-own, but the terms and conditions may vary.
Community land trusts
Community land trusts (CLTs) are nonprofit organizations that hold land for the benefit of the community. CLTs can provide affordable housing options and help preserve community assets.
The pros and cons of shared-equity homeownership
As with any homeownership model, shared-equity homeownership has its advantages and disadvantages.
Pros
- Increased affordability: Shared-equity homeownership can make homeownership more accessible to aspiring homeowners who may struggle with high down payments.
- Reduced debt: By sharing the equity in the property, homeowners may be able to reduce their debt burden.
- Shared risk: The investor or government entity shares some of the risks associated with homeownership.
Cons
- Reduced-equity building: Homeowners may build equity in their property more slowly, as they only own a portion of the property.
- Rules for resale: Shared-equity homeownership programs may have limits on how you can sell the property. This can limit how much money you can make from a sale.
- Complexity: Shared-equity homeownership programs can be complex and may require additional paperwork and negotiations. Professional assistance can be very valuable when approaching a shared-equity arrangement.
Why consider shared-equity homeownership?
In general, shared-equity homeownership can allow someone to start buying a home with a smaller financial burden. Shared-equity agreements can also offer a more stable way to own a home because the investor or government entity shares some of the risks. A home purchase, especially your first one, tends to be a significant milestone. Professionals you can trust can explain your options and help you along the way.
In conclusion
Shared-equity homeownership is a unique model that can benefit aspiring homeowners. Understanding how it works, specific programs and arrangements, buyers can make an informed decision. As the housing market evolves, shared-equity homeownership may become popular for those looking to achieve homeownership.
