Heard About Home Equity Sharing? Does It Beat a HELOC or Home Equity Loan?

What if you could get a lump sum of cash today, leveraging your home’s potential appreciation value?

You could.

With home equity sharing, a deed holder gets a lump-sum cash advance. The lender takes a share of the property’s appreciation. Also called a home equity investment (HEI), it’s an alternative to a home equity loan or line of credit.

Because homes are generally expected to rise in value in coming years, most deed holders have a good deal of future equity — as well as the value they currently hold. So, access to an HEI is a tool in the long-time deed holder’s toolbox. But is it worth picking up? Here, we discuss the good, bad, and ugly in these home equity sharing deals.

The Good

“I’ll gladly pay you Tuesday for a hamburger today.”

J. Wellington Wimpy

Say you can’t get approved for a home equity loan or a cash-out refinance. Maybe it’s because of a low credit rating, unemployment, or not enough income. You might still be able to get an HEI.

The application is relatively quick and easy. The company will need to review the title. It will also order an appraisal. When that work is done, the company will wire the lump sum to you, usually in just days.

In addition to the relative speed of the process, what’s a plus here? No monthly payments! You’ll owe nothing until the payment is due, years from now, as a balloon payment. Or until you opt to settle your agreement with the company. Or you sell your home.

If your home’s value rises, you’ll need to pay the company more at the end of the 10-, 20-, or 30-year term. If your home value sinks, you’ll owe the company less, right? With some companies, yes. But not all.

The Bad

“Paybacks are hell.”

Conventional Wisdom

If paybacks are financial hell, balloon payments are the hottest ring.

When the HEI reaches the end of its term, you must repay money you borrowed (principal), plus a significant percentage of the rise in property value. All at once. Because you have no crystal ball (or fancy AI like the lenders have), you won’t know the loan’s full cost until the end.

Oh, and note the origination fee. It can be as high as 5% of the amount of cash you pull out.

And another thing. Fees. The lender will deduct the costs of an appraisal and inspection, escrow services, tax, recording fees, and title insurance from your lump sum. Anticipate payoff and reconveyance servicing fees, too.

Perhaps the biggest pitfall of all is that you sell some of your equity away to receive cash today. And with that balloon payment looming, you’ll almost certainly have to borrow against that equity one day.

The Ugly

Now, for some of the hardest pills to swallow for HEI customers:

• You could feel as though you’re being penalized for making upgrades to your home. An HEI’s “remodeling agreement” should let you keep added value you put into your home, but some companies don’t fully credit you for your costs. 

• You can wind up owing these companies much more than they give. Say you pull $30K from your $300K home value. At the term’s end you must pay the company $30K plus the rate of say, 10% of the total appreciation. Look at your home’s appreciation so far, to work out just how much you could owe.

• And what if you’re caught financially flatfooted at the end of the term? Will you (or your loved one) be forced to sell and move, or face foreclosure? This is a real risk. HEIs create liens.

Word to the wise: Be sure the lending company has maximum debt and annualized cost limits (to cap the potential repayment).

What Do People Use HEI Cash Advances For?

No deed holder should let a company take a bite out of their home equity without a pressing reason. Here are a few reasons people borrow this way:

• To use the funds for a down payment on another property. Unlike a bridge loan, tapping home equity won’t throw off the deed holder’s credit report (particularly the debt-to-income ratio) when trying to buy a home.

• To start or outfit a small business. With business earnings, the deed holder may be able to quickly repay the funds.

• To pay off very high-interest debt without taking a hit on a credit report.

All these goals make sense. But is getting an HEI the best way to meet them? Deed holders need to know that HEI liens could rule out other forms of borrowing against their titles. Indeed, an existing mortgage company might not even permit the homeowner to do home equity sharing.

Who’s Who In HEIs? The Players

A few companies do this kind of financing. Most are fairly new companies. Each is active only in specific states. Here’s a lineup of some frequently mentioned home equity investment companies for your further due diligence. Companies and their terms can change.

Unlock

Got at least 20% home equity? Then you could qualify for a HEA from Unlock.  

With Unlock, you settle when you sell the home, or in 10 years — whichever happens first. Or you could speed up the process by repaying part or all early.

Unlock has two major fees:

• An origination fee of 4.9%, deducted from the amount you pull out of your home.

• The exchange rate. That’s the rate charged against the home’s rise in value. If you get an exchange rate of 2x, you’ll give up twice as much home value in the future as you get for your current equity. Thus if Unlock takes a 10% share of your home’s worth, it would take 20% of the property’s value at the end of the term.

Unlock, like other companies, may say “no” to applicants who already have second mortgages or other liens against their titles.

Hometap

With Hometap, a deed holder can reach as much as to 20% of a home’s value, up to $600,000. There’s not a lot of time on this one. The term is just ten years.

Hometap doesn’t have a risk adjustment (the rate on appreciation discussed above). This is in contrast to the risk adjustment rates of somewhere  between 2% and 30% of your home’s value that other companies charge.  

But… Hometap takes a share of the entire value of the home.  

Hometap’s credit score floor is just 500, which includes many more deed holders than other companies do.

Unison

Unison, when and where it’s available, gives you $30,000 to $500,000, up to 15% of your property value, minus the 3.9% transaction fee. You’ll need a credit score of 620+ to qualify.

There are no monthly payments, so no new loan goes on your credit profile. You get 30 years to settle the account.  

Uh oh. The exchange rate is at least 4X the percentage of shared value (up to 60% of your home’s future appreciation).

And if your home value goes down? You have to take that loss alone. As stated on the Unison webpage: Unison will not share in any decrease in value if you sell your home within five years of our investment or if you opt to buy us out without selling your home.

Point

Point lets you reach between $25,000 to a half-million dollars, with a nice, long repayment term of 30 years. You may settle early if you wish.

If your home appreciates, you repay the lump sum you were given as well as a certain percentage of the home’s value at the loan’s conclusion. Note that Point only invests in the appreciation of your home.

Point deducts a 3%-5% transaction fee from the amount it first wires to you. As for the adjustment rate, Point will cut your home’s appraised value by 15% or more, to cover its risk in case your property value sags.

Still Interested in Sharing Your Equity?

Know from the outset you’ll likely need at least 20% equity to qualify. Minimum credit scores vary by company.

If you think you could meet the criteria, it’s due diligence time. This article is offered only as a rough overview of how HEIs work.

So, speak with your financial adviser. Read all online reviews with care. Speak with reps. Be sure you really need that hamburger today.