A new low-interest rate mortgage that gives the lender a stake in your home's appreciation also comes with an added tax benefit but, as is always the case with innovative financing, beware of numerous caveats.

New York investment banker Bear Stearns & Co. Inc., has agreed to buy large numbers of new loans called "Shared Appreciation Mortgages" or "SAMs" from a thousand private lenders agreeing to work with Memphis-based National Commerce Bank Services.

Here's how SAM works.

For a fixed interest rate as much as two percentage points lower than typical market rates, you'll have to agree to share from 30 to 60 percent of your home's future appreciation with the lender. The more appreciation you share with the lender, the lower your rate. A low loan-to-value ratio can also help push down the rate.

You can pay as little as 5 percent down for a maximum loan of $650,000, provided you have relatively good credit, a Fair, Issac (FICO) credit score of 660 or higher.

You can use the 15 or 30 year loan for a new purchase or a refinance, but if within the first three years you repay the loan in full (or pay more than 20 percent of the original principal within any 12-month period) you'll face stiff penalties.

You can repay the loan in full after three years without penalty.

The lender could require you to pay additional interest attributable to the appreciation plus the remaining principal balance of the loan if a "mortgage termination event" occurs.

Such events include:

• Selling or transferring your interest in your home.
• Refinancing the loan.
• Failing to occupy the home securing the loan for more than 12 months.
• Renting your home.
• Foreclosure proceedings triggered by any other lien secured by your home.
• A condemnation proceeding by an authority exercising rights of eminent domain.
• A default on your loan.

If at the end of the loan's term or if you pay off the loan after three years and your home does not appreciate, you owe the lender nothing.

Lenders are willing to risk the low rate for a portion of the appreciation they could earn. Chances are, provided the economy continues to chug along as it has, the risk will be minimal. Lenders also will make SAMs across the country and while some homes may not appreciate, most likely will.

The loans will also give you an interest credit for the appreciation you are likely to share with the lender.

"The 'gain' that must be turned over to the lender becomes a deductible interest expense for the home owner-taxpayer, whether or not the gain is taxable, " says Leonard W. Williams, a Sunnyvale, CA certified public accountant who advises discussing the loan with your financial or tax professional before signing on the dotted line.

" Although no two situations are alike, and someone might come out on the short end, taking a deduction as interest will be an equitable tax treatment for the appreciation that was forked over to the lender," Williams added.

Published: November 3, 2000

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.