The home equity investment program is a hot new financing option for qualified savvy homeowners. Most people who own their home know that as the property rises in value, their equity increases. If you like, you can eventually leverage the equity with a home equity investment loan to cover home improvements, pay down high-interest debt, pay for college tuition, etc.
What is the Home Equity Investment Program?
If you are thinking about using some of the equity in your home, you probably know about home equity loans and home equity lines of credit (HELOC). These are second mortgages that you may qualify for to access some of your equity. However, if you have bad credit or have inconsistent income, qualifying for a second mortgage can be a struggle. In that case, the home equity investment program could be just what you need. Learn about this exciting program below, then talk to a loan professional in your area for more information.
The primary advantage of a home equity investment loan lie in the absence of monthly payments or interest costs, distinguishing it from home equity loans or home equity lines of credit (HELOCs). Furthermore, these investments entail less stringent credit and income requirements when compared to other home equity products.
Home Equity Investing Loan Highlights
Home Equity Investment Loan Program Overview
A home equity investment loan is an innovative way to tap a portion of your home equity without another mortgage and more monthly payments. Home equity investments are also known as home equity sharing agreements, and allow you to sell part of your home’s value in the future for cash today.
However, the investor you sell your equity to will only be able to claim part of it. They do not hold any ownership of your home and they are not on title. You will eventually buy the investor out with cash after the home equity loan term expires, or when you refinance the home or sell it.
The biggest benefit of this program is there are no interest costs or monthly payments. On the other hand, every home equity investment loan has payments and interest. These innovative home equity sharing agreement is also easier to quality for in terms of income and credit requirements than most home equity mortgages.
There are two popular home equity investment programs to choose from.
Home Equity Sharing: Within the home equity sharing framework, a homeowner consents to allocate a segment of their forthcoming home equity to an investor in return for a cash infusion. As the homeowner accumulates equity in their residence, the investor also benefits. This arrangement is occasionally known as an equity-sharing agreement.
Home Appreciation Share: In a shared appreciation model, the banks and investors sharing is limited to a portion of the appreciation or depreciation exceeding a predetermined initial value of the house, rather than a percentage of the entire property’s equity. This structure is commonly identified as an option-purchase agreement.
How a Home Equity Investment Account Works
The idea behind home equity investment loans isn’t hard to understand. An investor hands you a lump of cash now, such as $30,000. In exchange, they receive a certain stake of your home equity for a fixed period of years, such as 20%.
This arrangement usually means paying more for fast access to money because you will probably pay more than that sum to the investor as the home’s value rises. Still, this gives you an innovative way to tap home equity without boosting your debt load.
Basically, home equity investments reduce the money that you will make from your home equity, which rises as the home’s value goes up and you pay down your mortgage.
If you’re interested in a home equity investment, this is the basic process:
• An investor will order an appraisal of your property to determine its current value. In most cases, the investor will do an adjustment to the value to protect their investment if the home drops in value. They also may put a cap on what you would owe if the home’s value rose more than expected.
• The investor will make you an offer. The offer should state how much money you qualify for, the portion of equity that will be shared, and what the repayment terms are. You will probably need to pay the investor back, one way or another, in 10 to 30 years.
• You sign onto the agreement and cover the closing costs. You will usually need to pay appraisal fees, origination fees, and assorted expenses for third parties.
• You get your cash in a lump sum. You can spend this money on anything, such as college tuition, paying down debt, and home renovations.
• At the end of the term, you pay the investment company back their equity share, based on the home’s value. This buys the investor out and gives you back all of your equity.
At the end of the agreed term or an earlier chosen date, you reimburse the investor their share of your equity based on the home’s current value at that time. This transaction effectively concludes the buyout, returning all your home equity to you.
Depending on the chosen investor, repayment may involve settling the initial cash amount along with a predetermined percentage of equity, or simply paying the company the agreed-upon percentage.
In contrast, the majority of homeowners seeking to tap into their home’s cash value typically choose a cash out refinance mortgage or take out a 2nd-mortgage, or sell the property. In a high-interest rate environment, the prospect of acquiring a new home loan may not be very enticing. This is where equity-sharing agreements come into play.
More on the Process Works with Home Equity Investments
The investor will arrange for a 3rd-party appraiser to assess your home’s current value. Typically, the home equity investment company adjusts the valuation (reduces the appraised value) to safeguard against depreciation and may set a cap on your potential obligation if your property appreciates significantly.
Upon making an offer, the company specifies the upfront cash amount you qualify for, the proportion of your equity to be shared, and the repayment terms. Typically, the arrangement allows you to buy out the investor within 10 to 30 years. (120 to 360 months)
Upon entering the home equity investing agreement, you incur closing costs, covering expenses like the appraisal, an origination fee, and various third-party charges.
You receive a lump-sum cash payment, and this offers you flexibility to utilize the money as you see fit.
At the end of the agreed term (or earlier if you prefer), you repay the investor their share of your equity based on your home’s current value, effectively buying them out and regaining full ownership of your home equity.
The equity sharing agreement and repayment structure may involve returning the initial cash amount along with a predetermined equity percentage, or you might pay only the predetermined percentage, depending on the investor you choose.
How Home Equity Agreements Operate
Home equity investment companies can provide you with immediate cash in exchange for a share in your future home equity. Frequently, you’ll be required to repay the amount received at the end of a predetermined term, along with a percentage of any home equity gains accumulated during that period.
Example Of A Home Equity Investment
Let’s take a look at a theoretical example so you understand how the home equity investment program works. Suppose you own a home in Texas that is worth $500,000. You have $200,000 in equity and you want $100,000 cash from home equity investments. The investor offers you the $100,000 in exchange for a 25% stake in the home’s future appreciation.
If the home’s value rises to $740,000 in 10 years, you would pay back the $100,000, plus 25% of the increased value. Thus, in this example, you would pay $100,000 plus $60,000.
Benefits and Drawbacks of a Home Equity Investment
As with any financial product, there are benefits and drawbacks before selecting home equity investments.
One of the benefits is that the agreement usually has lower credit requirements than many equity products, and you don’t need to make monthly payments or pay interest. You also don’t usually need to have a minimum income to qualify.
However, you could lose wealth if your home rises dramatically in value. If you had gotten a home equity loan with a lower fixed rate, you could have paid less for the equity that you were loaned.
Also, the rate of return that an investor can make on a home equity investment depends on the market where the home is. Also important are the price at which the investor bought the equity, and the outstanding loan balance on the property. Furthermore, these investments are complex, and many homeowners don’t have the knowledge or experience to understand them.
You also need more equity to qualify for a home equity investment, and there are upfront fees to pay, and these investments aren’t available in all states.
Is It Smart To Make A Home Equity Investment?
As with most investments, it depends! A home equity investment can be a fantastic financial tool for many homeowners, but it isn’t for everyone. The right investing strategy largely depends on your finances, goals, property you own, and your long-term plans with real estate.
For instance, a home equity investment could be a good choice if you need money but don’t want the payments that accompany a home-equity loan. A home equity investment also may make sense if your credit score isn’t good enough to quality you for a traditional second mortgage. Similar to a bad-credit home equity loan, the home equity investment product requires a significant amount of equity to offset the risk.
On the other hand, a home equity investment might not be the best choice if you are in a more expensive housing market. If your home increases in value, you will need to pay the investor more than you would on many financial products, such as low-interest options such as an equity loan or cash-out refinancing.
The best way to find out if a home equity investment opportunity is a good fit is to speak to a loan or finance professional today about your options. Make sure that you fully understand the home equity investment that is being proposed to you. Otherwise, you could end up paying more than you expected down the road.
Who Should Consider a Home Equity Investment?
Tapping home equity is popular because it gives you fast cash for large-ticket expenses, such as paying for college tuition or a renovated kitchen. A home equity investment loan can be a good fit for a homeowner who wants their equity and higher cash flow without taking on more debt or making monthly payments.
These investments also appeal to a homeowner who already has a lot of debt or bad credit. It is easier to quality for a home equity investment than a traditional home equity loan or a cash out refinance . Also, people who are self-employed with varying income may have difficulty qualifying for a traditional home equity loan, so this program can make sense. Or, perhaps you have extra medical expenses and need cash, but cannot afford to make additional debt payments.
Getting approved for quick cash, particularly in the current economic climate, lacks a one-size-fits-all solution. Before engaging in home equity investments or finalizing the closing contracts from home equity loans, it is advisable to consult with a trusted financial planner and home equity investment company so that you can carefully consider your long-term financial objectives. Seeking a second opinion is a prudent step in this decision-making process.
How Do You Get a Home Equity Investment Loan?
There are plenty of home equity investors to pick from, so ensure that you do your shopping before deciding who is the best fit. You should think about fees, eligibility requirements, terms of repayment, and customer ratings before deciding. Many investment companies want the homeowner to have at least 25% equity in the home, but you should shop around as different home equity investment companies have their own criteria.
Also, not every lender will allow you to do an equity sharing agreement, or you could be penalized for doing it. You should check your loan documents to see if you can sell a portion of your equity without repercussions. For more information about home equity investment programs, talk to a an experienced loan officer from a trusted home equity investment company in your area.