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When your home increases in value, your equity in the property grows. Eventually, you can leverage this equity to pay for home improvements, pay off debts, or cover other expenses.
If you’re considering tapping your home equity, there are various ways to do it. However, if your credit score is low or your earnings are inconsistent, your options may be limited. In these scenarios, a home equity investment is an option. Here’s what you need to know about these agreements.
In this article:
- What is a home equity investment?
- Pros and cons of a home equity investment
- Is a home equity investment a good idea?
- How to get a home equity investment
What is a home equity investment?
A home equity investment is a strategy for turning your home’s equity into cash. Also called home equity sharing agreements, these allow you to essentially sell a portion of your home’s future value in exchange for a lump-sum payment today.
Don’t worry, though: The investor only claims part of your equity. They don’t hold any sort of ownership stake, nor are they added to your home’s title. You’ll eventually buy them out in cash after a certain period or when you sell the home or refinance.
The big benefit of a home equity investment is that it comes with no monthly payment or interest costs, while home equity loans or home equity lines of credit (HELOCs) do. These investments also have less stringent credit and income standards compared to other home equity products.
Here’s how these three home equity products measure up:
|Home equity investment||Home equity loan||HELOC|
|Minimum credit score||500||620||Mid-600s|
|Income requirement||None||Yes, varies||Yes, varies|
|Interest rates||None||Yes, usually fixed||Yes, usually variable|
|Term length||10 to 30 years||5 to 30 years||10 to 20 years|
How it works
The basic premise of a home equity investment is simple: An investor gives you a set amount of cash today—say $30,000—in exchange for a percentage of your home’s equity in a set number of years—say 20%.
This typically means paying more for quick access to cash in the long run because you’ll likely pay more than $30,000 back once your home appreciates. Still, it offers a way of accessing your home equity without increasing your debt load.
Essentially, a home equity investment limits how much money you stand to gain from your equity, which increases as your home’s value rises and as you pay off your mortgage loan.
Here’s a general look at the home equity investment process:
- The investor will send out a third-party appraiser to determine the current value of your home. Typically, the investment company will make a valuation adjustment (i.e., lower the appraised value of your home) to protect themselves in the event of depreciation. In some cases, they may also place a cap on how much you would owe if the home appreciates significantly.
- The company will make an offer. This should include how much cash you qualify for upfront, how much of your equity will be shared, and the repayment terms. You can typically expect to buy out the investor within 10 to 30 years.
- You enter the agreement and pay closing costs. You will typically need to cover the costs of the appraisal, an origination fee, and various third-party expenses.
- You get a lump-sum cash payment. You’re free to spend this money however you like.
- At the end of your term (or earlier if you choose), you will pay the investor their share of your equity, based on the home’s current value at that time. This effectively buys them out and returns all your home equity to you.
Depending on which investor you go with, you may pay back the initial cash amount plus a predetermined percentage of equity, or you may simply pay the company only the predetermined percentage.
Home equity investment example
See below for an example of how a home equity investment would work if your home gained value or lost value over time. Keep in mind: The exact numbers will vary depending on your home, location, equity, and the investor you choose to go with.
|Appreciated Home||Depreciated Home|
|Starting home value||$500,000||$500,000|
|Adjusted home value||$487,500||$487,500|
|Home value at repayment||$587,500||$387,500|
|Equity being shared||20%||20%|
|Principal funding amount||$25,000||$25,000|
|Amount you owe||$45,000||$5,000|
In most cases, you’ll need to pay the amount owed at the end of your repayment term or when you sell or refinance your house. One home equity sharing company—Unlock—actually allows you to make partial buyout payments, which lets you spread out your repayment over time.
Pros and cons of a home equity investment
As with all financial products, there are both pros and cons to consider before agreeing to a home equity investment.
The upsides are that these agreements typically have lower credit score requirements than other equity products, and there are no monthly payments or interest costs. You also typically don’t need to meet any minimum income threshold.
There are drawbacks, though. For one, you could end up losing out on significant wealth if your home appreciates in value considerably. You also typically need a large share of equity to qualify, and you’ll need to cover a variety of upfront fees.
- Minimum credit score requirements are low compared to other home equity products
- No monthly payments
- No interest charges
- No minimum income requirements (good for self-employed professionals)
- You get a lump sum cash payment you can use for anything
- The investor shares in the depreciation of your home
- You could lose out on significant equity if your home increases in value
- You typically need to have substantial equity in your home to qualify
- There are various closing costs and fees
- Not available in every state
Is a home equity investment a good idea?
There’s no hard-and-fast answer to this question. While a home equity investment can be a wise move for some homeowners, it may not be the best choice for others. The right strategy really depends on your finances, goals, property, and long-term plan as a homeowner.
For example, a home equity investment might be smart if you need cash but can’t handle the monthly payments that come with a home equity loan or your credit score won’t qualify you for a HELOC.
On the other hand, it might not be the wisest move if you’re in a particularly high-value housing market. Should your home appreciate significantly, you may pay the investor much more than you’d spend on other financial products—particularly low-interest options like home equity loans or cash-out refinances.
How to get a home equity investment
There are many home equity investors to choose from, so make sure to shop around before deciding who to sign your agreement with. You should consider customer ratings, fees, eligibility requirements, repayment terms, and geographic eligibility.
Our team compared several of these companies based on these factors to determine which were the best for different homeowners. Check out the best home equity sharing companies based on our research.
Author: Aly Yale