Putting Your Home’s Value to Work: An Overview
Most homeowners interested in cashing out their home equity do so through more conventional means, such as a cash-out refinance, home equity loan, or home equity line of credit (HELOC). Clients can access their property’s wealth through a home equity investment or “equity-sharing agreement.”
A home equity investment is a way to obtain a lump amount in exchange for a share of your future home equity. Not all homeowners can take advantage of these arrangements due to their complexity. However, for individuals who need immediate cash, this is a viable alternative to taking out a second mortgage.
Here’s some information to remember if your customer has expressed interest in an equity share agreement.
The definition of a home equity investment.
You can sell a portion of your home’s equity in exchange for a lump sum using a novel financial product known as a home equity investment, also known as an equity-sharing agreement. However, this is not a loan, and there will be no recurring payments. It doesn’t need you to go into debt or sell your house, though.
Instead, most homeowners who want to tap into their home’s equity must either sell the property, take out a second mortgage, or refinance their current mortgage. A new mortgage may seem bad when interest rates are low. And that’s when things like stock transfer agreements come in handy. By teaming up with a home equity investing firm like Hometap, Splitero, Unlock, Unison, Point, or Fraction, you may quickly convert a portion of your home’s equity into cash.
How equity-sharing agreements work
In exchange for a share of your future home equity, home equity investment companies might immediately provide you with a lump sum of money. You’ll typically be required to pay back the loan, plus interest, at the end of the term, plus a portion of any appreciation in your home’s value.
An Example of Investing in Home Equity
Certified financial advisor and editor Andrew Latham say home equity investment procedures may differ slightly from one firm to the next. To illustrate the operation of a single model, consider the following:
Let’s say you have a California property valued at $500,000. Your current equity is $200,000. You plan to ask a home equity loan provider for $100,000. In exchange for a 25% stake in your home’s future appreciation, the corporation will give you $100,000, as Latham explains.
He says, “Let’s imagine that over the next decade (a decade is a standard timeframe for a home equity investment), the value of your home increases to $740,000. That’s based on an expected yearly appreciation rate of about 4%, which is roughly average. In this case, you would have to pay back the initial $100,000 plus 25% of the increase in the value of your home. If your home’s value increases to $240,000, and you raise your loan by 25%, your new total debt would be $160,000.
There are two main ways to use your home’s equity:
There are two types of home equity investments: equity participation and appreciation participation. The former benefits the home equity investor in tandem with the homeowner’s increase in property value. As for the latter, the investor receives a smaller percentage of the growth above a certain base value.
Benefits of Investing in Home Equity
Unlike a cash-out refinance, home equity loan, or home equity line of credit (HELOC), a home equity investment allows you to access your equity without taking on additional debt. According to Latham, no monthly payments are another benefit, especially for homeowners with limited financial resources. The amount you owe the investor will change depending on how much your home appreciates. Your monthly payment will decrease in proportion to the decline in your home’s value.
In addition, the repayment period for investments and appreciation shares under shared appreciation models is typically at least ten years. There are only required payments due at the end of the term, either monthly or otherwise. (You must make repayments if you sell or refinance your house before the time is over.)
the risks of investing in home equity
If your home’s value grows dramatically, you may have to pay back a large portion of your equity at a high-interest rate to the corporation. You might have gotten a better return on the money you pulled out of your home’s equity if you had used a loan or refinance that took cash out instead.
Kelly McCann, a Portland, Oregon-based attorney, notes that the rate of return a company can earn on a home equity investment will depend on the market in which the home is located, the price at which the home equity investor purchased the home equity, the relative attractiveness of the house in the market, and the balance outstanding on loan encumbering the home.
Investments using home equity are also not always easy to grasp.
“Generally, most homeowners simply do not have the requisite understanding of securities laws to appreciate the risks they are taking by selling a portion of the equity in their home,” says McCann.
Who should think about tapping into their home’s equity?
The benefits of using your home’s equity are substantial. You might use debt consolidation to eliminate interest-heavy balances or finish paying off your school loans. You may need money for a sizable home renovation or a down payment on a rental property. Or perhaps you’re prepared to start a brand new company. Tapping into your home’s equity might provide an immediate source of cash.
Homeowners who want to boost their income flow and reduce their monthly payment obligations may find home equity investments a viable choice. Because of its more lenient eligibility requirements, “home equity investments are also attractive for homeowners with a high debt-to-income ratio or who do not have excellent credit,” Latham says. Home equity investments can be an alternative for homeowners who don’t want to take on additional debt or don’t qualify for traditional home equity loans.
You may have a fluctuating income or work for yourself. Perhaps you are experiencing a brief period of unemployment or have incurred some unplanned medical expenses. According to Rachel Keohan, VP of Marketing for Boston-based Hometap, “as interest rates and the cost of debt increases, home equity investments become especially appealing to a wide range of homeowners because there are no monthly payments or interest attached.”
How to qualify for a home equity investment
Some requirements must be met before receiving a home equity loan or line of credit. For instance, Keohan explains, we typically only invest in properties where the homeowner has at least 25% equity. There may be better fits if the loan-to-value (LTV) ratio exceeds 75%. McCann warns that you should talk to your mortgage lender before forming an equity pooling agreement. McCann believes that mortgage-secured loan terms often make it difficult, if not impossible, for a homeowner to liquidate some of their wealth.
Before you sign a home equity investment contract, please do your homework. Consumer review sites, such as Trustpilot, can provide you a more accurate picture of what it’s like to be a homeowner than can reviews from financial companies. “Shop around among different home equity investment companies, compare multiple offers before accepting one, and read all fine print carefully,” advises Latham. Consider hiring an attorney to analyze the agreements and documentation, and make sure there are no penalties for getting into an equity-sharing deal by checking with your mortgage lender.
Alternative methods of releasing equity from a residence
If you want to borrow money against the value of your property, you don’t have to resort to a home equity investment or shared-equity arrangement. Instead, if you meet the requirements, you can access the equity in your house by
- A second mortgage secured by your house that provides a lump sum payment at closing;
- Access to a revolving line of credit secured by your home;
- Refinancing your primary mortgage and getting cash out of the equity you’ve built up with a cash-out refinance, or getting a reverse mortgage if you’re 62 or older.
- Your customer may find that one of these solutions is more suitable to their needs without requiring them to give up any of their potential future equity growth.
