The Basics of a Participation Mortgage

A participation mortgage is a type of mortgage for which the lender has a vested interest in the appreciation of the property. Instead of making their money only off of interest payments and closing costs, the mortgage lender tries to make some of the money off of the back-end of the real estate transaction as well. 

With this type of loan, it is common for the home buyer to make interest-only mortgage payments during the life of the loan. There may be a balloon payment involved at the end of the loan term. The bank will then also include some type of participation rate that they will take when the house is sold. For example, if the homeowner sells the property and makes a certain amount of money in appreciation, the bank might take half of the appreciation. 

In return for giving up a big part of the appreciation of the house, the homeowner will generally be able to get a lower interest rate from the lender. The homeowner is essentially getting a discount up front so that he or she can give up more money on the back-end. This type of transaction is risky for lenders because they do not know how much they will bring in.

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