What is an equity investment?

Touch equity without a second mortgage

Most homeowners who want to liquidate their equity are looking for traditional mortgage options such as cash refinancing, equity loan or HELOC. But there is another way to take advantage of your home’s equity today: an equity investment or an “equity sharing agreement.”

By investing in equity, you sell part of your future equity and receive a one-time cash payment in return. These agreements can be complex and not every homeowner will be eligible. But for those who do, it can be a smart way to access the monetary value of your home without taking on a new mortgage payment.

If you are interested in a capital sharing agreement, here’s what you need to know.

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What is an equity investment?

An equity investment, also called an “equity sharing agreement,” is a relatively new financial product that allows you to sell equity in your home in exchange for a cash advance. But this is not a loan and no monthly payments are required. In addition, this does not include taking on debt or selling your home.

In contrast, most homeowners who want to gain access to the monetary value of their home must either refinance their mortgage, take out a second mortgage or sell the property. In a high rate environment, taking out a new home loan may not sound very attractive. Here, too, capital-sharing agreements come into force.

With this arrangement, you partner with an equity investment company – such as Hometap, Splitero, Unlock, Unison, Point or Fraction – and get quick money by selling part of your accumulated equity.

How equity agreements work

Equity investment companies can offer you immediate cash in exchange for a share in your future equity. You will often have to pay the amount given to you at the end of a certain period – plus a percentage of all the capital gains you have accumulated during that time.

Example of equity investment

Andrew Latham, a certified financial planner and editor at SuperMoney.com, says the way equity investments work can vary slightly from company to company. Here is an example of how a particular model works:

“Imagine you own a home in California worth $ 500,000. You have accumulated $ 200,000 in equity. You are looking for $ 100,000 in cash from an investment company for equity participation. The company is offering you $ 100,000 for a 25% stake in the future valuation of your home, ”says Latham.

He continues: “Suppose the value of your home rises to $ 740,000 over the next 10 years (a decade is a common term for equity investment). This assumes an annual appreciation rate of about 4%, which is close to the historical average. In this scenario, you will be required to pay back an investment of $ 100,000, as well as 25% of the appraised value of your home.

Using this example, this would mean that you owe $ 100,000 plus $ 60,000 ($ 240,000 in increased home value x 25%).

Two types of equity investments

Equity investments are actually offered in two forms: shared capital and shared valuation. With the first, while building equity in your home, the equity investor does the same. In the latter, the investor shares only part of the appreciation above a certain starting point.

Equity investment professionals

The main advantage of investing in equity is that you can withdraw equity without filling yourself with additional debts, unlike refi, equity loan or HELOC.

“Besides, there are no monthly payments, which is a big plus for homeowners who are struggling with cash flow,” says Latham. “The amount you have to return to the investor will vary depending on how much the value of your property increases. If your home falls in value, the amount you have to return also decreases. ”

In addition, with shared valuation models, you are usually at least 10 years old, while the investment plus the share of the appreciation must pay off. It is not necessary to make monthly or minimum payments before the expiration of this period. (You will have to pay if you sell or refinance your home earlier, however.)

Cons of equity investments

On the other hand, you may end up paying the company a high rate of return on the equity you sell if the value of your home increases significantly. If you have instead chosen an equity loan or refi with a lower fixed interest rate, you may have paid less for the equity you have liquidated.

“The percentage of return that a company can gain from an equity investment will depend on the market in which the home is located, the price at which the equity investor bought the equity, the relative attractiveness of the home on the market and the loan balance burdening the home, ”said Kelly McCann, a Portland-based lawyer.

Equity investments can also be difficult to understand.

“In general, most homeowners simply do not have the necessary understanding of securities laws to assess the risks they take by selling part of their equity in their home,” McCann added.

Who should consider investing in equity?

Using your own capital can have great benefits. You may want to consolidate high-interest debt or repay your student loans. Maybe you want to finance an expensive home improvement project or make an initial investment property investment. Or you are ready to start a new business venture. Whatever the reason, liquidation of equity can offer a quick cash solution.

Equity investments can be a good option for homeowners who want to raise equity and increase cash flow without filling up additional debt or having to make monthly payments.

“Equity investments are also attractive to homeowners with a high debt-to-income ratio or who do not have excellent credit, as equity investments tend to have more forgiving eligibility criteria,” Latham continued.

Equity investment may also provide an option for homeowners who may not be eligible for other equity loans or simply do not want to take on debt.

“Maybe you are self-employed or have a variable income. Or you may be temporarily unemployed or dealing with unexpected medical expenses. As interest rates and the price of debt rise, equity investments become particularly attractive to a wide range of homeowners because there are no monthly payments or interest, ”says Rachel Kiohan.,, vice president of marketing for the Boston-based Hometap.

How to qualify for equity investment

To be eligible for equity investment, you will need to meet specific criteria.

“With our company [Hometap]”For example, we usually only invest in properties where the homeowner has at least 25% equity built into their home,” says Keohan. “So if the loan-to-value ratio (LTV) is greater than 75%, Hometap may not be the most appropriate.”

McCann warns that your mortgage lender may not allow you to enter into an equity sharing agreement or you may be penalized for doing so.

Some mortgage companies charge a penalty to borrowers who enter into a capital-sharing agreement. Consult your mortgage lender before choosing an equity investment.

“Often, mortgage loan documents prevent a homeowner from selling part of his equity in his home without adverse effects,” McCann said.

Do your due diligence before committing to an equity investment agreement. While reviews from financial websites are certainly helpful, consumer review sites like Trustpilot can help you get a better feel for the real experience of homeowners.

“Shop among different equity companies, compare multiple offers before accepting one, and read all the fine print carefully,” recommends Latham.

Also, consult with your mortgage lender to make sure there are no penalties for entering into a capital-sharing agreement and consider hiring a lawyer to review the agreements and documentation.

Alternative options for access to equity

Investing in equity or a share capital agreement is not your only choice if you want to access the monetary value of your home. If you qualify, you can instead raise equity from your home by:

  • Equity loan, which serves as a secured second mortgage and pays a lump sum upon completion
  • Equity credit line (HELOC), from which you can withdraw and repay if necessary
  • Cash refinancing, which involves withdrawing equity while refinancing your main mortgage loan
  • Reverse mortgage if you are 62 or older

One of these options can serve your needs without offering part of your future equity gains.

If you are not sure which is the best way to use your equity, contact a mortgage lender or financial advisor who can guide you in detail through your options and help you choose the best product for your financial situation.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its employees, parent or affiliates.

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