Tap into your home equity without a second mortgage
Most homeowners looking to liquidate their home equity turn to traditional mortgage options like a cash refinance, home equity loan, or HELOC. But there’s another way to tap into the equity in your home today: an investment in your home’s equity or a “net worth sharing agreement.”
With an investment in your home equity, you sell some of the equity in your future home and receive a lump sum cash payment in return. These agreements can be complicated and not all owners will qualify. But for those who do, it can be a smart way to access your home’s cash value without having to take on a new mortgage payment.
If you’re interested in a stock split deal, here’s what you need to know.
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What is a home equity investment?
A home equity investment, also known as an “equity split agreement,” is a relatively new financial product that allows you to sell the equity in your home in exchange for an upfront cash payment. But it is not a loan and no monthly payment is required. Plus, it doesn’t involve going into debt or selling your home.
In contrast, most homeowners who want to access the cash value of their home must either refinance their mortgage, take out a second mortgage, or sell the property. In a high interest rate environment, taking out a new home loan may seem unattractive. And this is where capital sharing agreements come into play.
With this arrangement, you partner with a home equity investment company – such as Hometap, Splitero, Unlock, Unison, Point or Fraction – and get some quick cash by selling some of the equity in your property that you have accumulated.
How Share Sharing Agreements Work
Home equity investment companies can offer you immediate cash in exchange for a stake in the equity in your future property. Often, you will be required to repay the amount awarded to you at the end of a specified period, plus a percentage of any gain in your home equity that you accrued during that period.
Example of investing in home equity
Andrew Latham, a certified financial planner and editor of SuperMoney.com, says how real estate investments work can vary quite a bit from company to company. Here is an example of how a specific model works:
“Imagine that you own a house in California worth $500,000. You have $200,000 in accumulated equity. You are looking for $100,000 in cash from a home equity investment company. The company offers you $100,000 for a 25% share in the future appreciation of your home,” says Latham.
He continues, “Let’s say your home value increases to $740,000 over the next 10 years (a decade is a common term for an investment in home equity). This assumes an annual appreciation rate of around 4%, which is close to the historical average. In this scenario, you would be required to repay the $100,000 investment as well as 25% of the appraised value of your home.
Using this example, that would mean you owe $100,000 plus $60,000 ($240,000 home value increase x 25%).
Two types of home equity investments
Home equity investing actually comes in two forms: shared equity and shared appreciation. With the former, as you build equity in your home, so does the home equity investor. With the latter, the investor shares only part of the appreciation beyond a defined starting point.
Home Equity Investment Professionals
The main benefit of entering into a home equity investment is that you can withdraw the equity in the property without going into further debt, as opposed to a cash refi, home equity loan, or HELOC.
“Plus, there are no monthly payments, which is a big plus for homeowners struggling with cash,” Latham says. “The amount you have to return to the investor will vary depending on how much your property increases in value. If your home loses value, the amount you have to pay back also decreases.
Also, with shared appreciation models, you typically have at least 10 years before the investment plus the appreciation share is paid back. No monthly or minimum payments need to be made before the expiration of this term. (You will, however, have to repay if you sell or refinance your home sooner.)
Disadvantages of investing in home equity
On the other hand, you may end up paying the company a high rate of return for the equity you sold if the value of your home increases significantly. If you instead opted for a home equity loan or refinance with a lower fixed interest rate, you may have paid less for the equity you liquidated.
“The rate of return a business can earn on a real estate investment will depend on the market in which the house is located, the price at which the real estate investor purchased the equity in the house, the relative attractiveness of the house on the market, and the outstanding balance on the loan encumbering the housing, Kelly McCanna Portland-based attorney, points out.
Home equity investments can also be tricky to understand.
“In general, most homeowners simply don’t have the required understanding of securities laws to appreciate the risks they’re taking on by selling some of the equity in their home,” adds McCann.
Who should consider investing in home equity?
Tapping into the equity in your home can have big benefits. Maybe you want to consolidate high-interest debt or pay off your student loans. Maybe you want to finance an expensive home improvement project or make a down payment on an investment property. Or you are ready to start a new business. Whatever the reason, liquidating home equity can provide a quick cash solution.
Home equity investments can be a good option for homeowners looking to extract equity from their home and increase their cash flow without taking on more debt or having to make monthly payments.
“Home equity investments are also attractive to homeowners with a high debt-to-equity ratio or who do not have excellent credit, as home equity investments tend to have eligibility criteria. more forgiving,” Latham continues.
A home equity investment can also provide an option for homeowners who may not qualify for other home equity loans or simply don’t want to go into debt.
“Perhaps you are self-employed or have variable incomes. Or maybe you are temporarily unemployed or facing unexpected medical bills. As interest rates and the cost of debt rise, equity investments are becoming particularly attractive to a wide range of homeowners, as there are no monthly payments or interest attached,” says Rachel Keohan, vice president of marketing for Hometap, based in Boston.
How to qualify for a home equity investment
To qualify for a home equity investment, you will need to meet specific criteria.
“With our company [Hometap], for example, we generally only invest in properties where the owner has built up at least 25% equity in their home,” says Keohan. “So if the loan-to-value (LTV) ratio is over 75%, Hometap might not be the best fit.”
McCann warns that your mortgage lender may not allow you to enter into a capital sharing agreement, or you may be penalized for doing so.
Some mortgage companies impose a penalty on borrowers who enter into a capital sharing agreement. Check with your mortgage lender before deciding on an investment in your home equity.
“Often, the loan documents on the mortgage-backed loan prevent the homeowner from selling some of the equity in their home without suffering negative repercussions,” says McCann.
Do your due diligence before entering into a home equity investment deal. While reviews from financial websites are certainly helpful, consumer review sites like Trustpilot can help you get a better idea of real-life owner experiences.
“Shop around with different real estate investment companies, compare multiple offers before accepting one, and read all the fine print carefully,” recommends Latham.
Also check with your mortgage lender that there are no penalties for entering into a stock split agreement and consider hiring a lawyer to review the agreements and documentation.
Alternative options for accessing your home equity
A home equity investment or equity split agreement isn’t your only choice if you want to access your home’s cash value. If you qualify, you can instead extract your home equity through:
- A home equity loan, which serves as a secured second mortgage and pays out a lump sum at closing
- A home equity line of credit (HELOC) that you can draw on and repay as needed
- A cash refinance, which involves withdrawing equity while refinancing your primary mortgage
- A reverse mortgage if you are 62 or older
One of these options may meet your needs without offering a portion of your future stock gains.
If you’re unsure of the best way to leverage your home equity, contact a mortgage lender or financial advisor who can explain your options in detail and help you choose the best product for your financial situation.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.