Topics:shared equity agreements
Guest Post by Andrew Latham
In the last year, the home equity of American homeowners has increased by $590 billion. Unemployment and wage cuts, on the other hand, have increased. So, it’s no surprise that millions of homeowners are trying to tap into their home equity.
There are several methods for tapping into your home equity. Home equity loans, home equity lines of credit, cash-out mortgage refinancing, and reverse mortgages are the best known. However, there is another way that does not require you to get further in debt.
I am talking about shared equity agreements, also known as home equity investments. I'll answer three of the most common questions relating to shared equity agreements.
Shared equity agreements provide a way to get a lump sum of cash in exchange for a share in the equity accumulated in your property. You don’t lose ownership of the property. There are no monthly payments or interest rates to worry about, either.
How is this possible?
Shared equity agreements require you to sell a share of your home’s future value. When you sell you home, or whenever the contract ends — which is usually 10 to 30 years — you either return the investment with savings, sell the house, or negotiate a new partnership with the investor.
One way to understand how shared equity investors work is to think of silent investors in a business. Silent investors provide capital without getting involved in the daily running fo the business. When the company makes a profit, they share the benefits. If the business loses money, so do the silent investors.
If you are considering a shared equity agreement, you will need to choose between the two main types: share of home value and share of appreciation.
Investors who use a share of appreciation model require you to return the full investment plus an agreed percentage of the increase in your home’s value when you sell the property or when the contract term ends. This is the model used by most shared equity investors, such as Noah.
In the share of home value model, on the other hand, the investor receives a fixed percentage of the home’s value once the contract term ends or you sell the property. This is the method companies like Hometap use.
There is no way to accurately calculate the cost of a shared equity agreement because nobody can accurately predict how the housing market will perform in the next year, never mind the next 10 or 30 years. Nevertheless, we can get a good idea of what a home equity agreement can cost by using a couple of scenarios as examples.
First, let’s assume your property increases in value by five percent a year. That is about the average annual home appreciation rate. In such a scenario, a $50,000 home equity investment on a $500,000 home would have a total cost of $136,000 after 10 years. Expressed as an APR, that is a 24.9 percent fixed-rate home equity loan. That seems a little high, but good luck finding a lender who will give you $50,000 and not charge you monthly payments for ten years.
For our second scenario, let’s imagine that a decade after getting your shared equity agreement your home has not increased in value. In such a case, you could end with a $50,000 loan that has the equivalent of a 0 percent APR.
Shared equity agreements can be a good option for homeowners who have substantial equity in their homes but are already struggling to pay other debts, such as a mortgage, auto loan, or credit card debt.
For example, imagine you are already struggling to make it to the end of the month on your budget, but you want to help send your child to college or need to buy a new roof for your home. A shared equity agreement could give you the cash you need when your debt-to-income ratio is too high to qualify for a regular equity loan.
Home equity investments are not a good option for everyone, though. Homeowners who are planning to stay in their homes for more than the term length of a shared equity agreement (10 to 30 years) may want to consider another option.
If you have excellent credit scores and a low debt-to-income ratio, you may want to look at traditional home equity financing products, such as HELOCs and cash-out refinance mortgages.
Shared equity agreements can be a good choice for homeowners with substantial home equity — typically you need at least 25 percent — who need cash but either can’t afford or don’t want to get deeper in debt.
However, shared equity agreements are a new option that provides significant advantages to homeowners who have substantial equity in their homes — typically, you need 25 percent or more — and who need cash but can’t afford or don’t want to get further in debt.
Andrew Latham is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.
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