Maximizing Your Home's Worth
What is a Home Equity Investment?
Thanks to rising property values during the pandemic and record-low interest rates, homeowners now have more equity in their properties than ever before.
In fact, according to The Mortgage Monitor, the average mortgage-holding homeowner has a record-high amount of equity in their property at $299,000. In 2010, that number was only $87,000.
However, due to poor credit or inconsistent income, some may find it difficult to access that equity through a home equity loan or HELOC.
A home equity investment, also called a home equity sharing agreement, is a way for homeowners to access the cash value of their home without taking on debt or selling it entirely. Essentially, you sell a portion of your home's future appreciation to an investor in exchange for a lump sum of cash today.
How Does a Home Equity Investment Work? (An Example)
For example, let’s say that you purchased your home for $159,000 with 3.5% down in 2015. The market has now appreciated and the home is now worth a whopping $240,000. Based on your estimates, you have over $100k in equity in the property. Now you’d like to take a portion of your home equity out to finance a bathroom remodel – but you have no way of accessing that money.
To make matters worse, you were laid off during the pandemic and your side hustle slowly grew into your main hustle. Your income has taken a significant hit, and qualifying for a home equity loan or a HELOC will require you to pay interest rates north of 8%.
Instead, you can look into a home equity investment or equity sharing agreement. These agreements vary depending on your situation, but they typically require a borrower to stake a portion of their home equity (11%, for instance) in exchange for a lump-sum cash payment now.
Reviewing the details from our example, a home equity investment might look like this:
- 2024 home value: $240,000.
- Amount of equity that you have in the property: $100k.
- Amount of money needed for bathroom remodel: $25k.
- A home equity investment company offers you $25k now in exchange for 11% of your home (11% of $240,000 = $26,400).
You now have the money for your bathroom remodel, but you spent 11% in your home’s equity.
If fifteen years from now, you go to sell your home and it’s appreciated to $350,000, that 11% is now worth $38,500. You repay the home equity investment company.
However, the terms may vary. You might be required to pay back the 11% stake at the end of a set period. Additionally, the home equity investment company sets the price of their portion of the investment based on how much they expect the property to appreciate, which might be higher than you expected.
So what are the benefits and drawbacks?
Pros and Cons of a Home Equity Investment
Pros of Home Equity Investments
- You can have below a 620 credit score, which is typically the minimum for a home equity loan.
- There are no monthly payments.
- There are no interest charges.
- There are no minimum income requirements.
Cons of Home Equity Investments
- If your home increases in value, you lose out on that percentage of home equity.
- Some home equity investment companies have uncapped equity agreements. If your house somehow triples in value, so does their portion of equity. That ~$26k could end up costing you more like ~$78k.
- If you want to pay off the lien early, the investment company sets the price based on their market appreciation expectations – and they might charge an additional fee.
- You need a significant amount of home equity.
- Terms can be confusing and difficult to negotiate.
FAQs
How Does a Home Equity Investment Differ From a Home Equity Loan?
A home equity investment isn’t a loan. Instead, you’re selling a portion of your home equity in exchange for cash now. If you own your $400k home outright, for example, and you sell 10% of it, you should theoretically receive $40k in cash.
A home equity loan lets you borrow money using the value of your home as collateral. You get a lump sum payment upfront, with fixed interest rates and repayment terms, typically 5-30 years.
What are the Benefits of a Home Equity Investment?
You can have a low credit score and no income. As long as you have equity in your home, you can qualify.
What are the Alternatives to an Equity Sharing Agreement?
A home equity line of credit (HELOC), home equity loan, reverse mortgage (if you’re 62 or older), and a cash-out refinance are all alternatives to equity sharing agreements.