Do you ever feel like you’re not fully utilizing your home and the investment you made by buying it?
If the answer is yes, don’t worry, because you’re not alone in this, but with equity sharing agreements, you may be able to get some extra cash out of your property.
This is done by giving a company or a lender a small ownership stake in the property itself, and while this doesn’t allow them to actually use the home’s spaces or lease them out, it allows them to participate in the home’s value increases and decreases.
You’d be surprised by the number of companies that actually offer this opportunity, and it’s wildly different from a standard mortgage or home equity loan, as it doesn’t require you to make any monthly payments or cover the interest rates.
Instead of that, all you need to do is cover the equity advance the company gave you at the conclusion of the agreed-upon period, followed by a small percentage of the increase in value your property gained.
How does it work
To put it simply, home equity sharing agreements are similar to balloon-payment loans, meaning that they’re not exactly for those not willing to make a risk.
However, the upside is that it allows you to cash out some of your home’s equity without having the commitment to make any monthly payments, although you shouldn’t commit to this option unless absolutely necessary.
This is because of the adverse position you put yourself in by opting for this agreement, as you’ll be facing a deadline to pay back the entire investment the company made, paired up with a percentage of the property’s appreciation.
These agreements usually last for 10 years, albeit some companies like Unison do offer agreements that can last up to 30 years instead.
While 30 years does sound like a safer option, you should also consider the possibility that you may not be able to pay back the appreciation percentage by then.
HELOC vs home equity sharing
Apart from the aforementioned agreements, HELOCs are yet another way to make use of your home’s equity value without actually giving up your home for sale.
The main difference between the two is how they’re structured, as well as the fact that each has its own benefits and downsides that cater to different kinds of homeowners.
HELOC serves as a second mortgage that gives you the ability to draw cash from your home whenever you see fit, as long as it’s under an agreed-upon percentage of your home’s equity value.
This drawing period typically lasts up to 10 years, after which you’ll enter the repayment period, where you’ll be forced to repay the interest rate as well as the principal value.
On the other hand, home equity sharing agreements are considered to be more of an investment for the person/company lending you the money, as they’ll eventually be taking a portion of the earnings from the property’s appreciation over time.
At first, it may seem like the lender takes on a massive amount of risk by doing this, but if you add two and two, you’ll know that homeownership is one of the best ways to pile on wealth, and while you personally won’t be making any monthly payments, you’re practically giving up your future earnings instead.
How much does it actually cost
Before the agreement is made, the homeowner must first pay for the appraisal of the property, as well as the transaction fee and a number of other fees that are related to title and escrow.
Once you add them all up, these fees can take a huge chunk out of the funds you’ll be able to use, and that’s also determined by the lender.
Unison, for example, lowers your home’s appraisal by 2.5%, in order to adjust for the risk that comes with investing in the property, whereas other lenders are much more strict when it comes to this, with Point deducting up to 20% at times.
What this means is that from the moment you sign the agreement, you practically owe the lender more than you’ll be receiving, regardless of how much the home’s value increases over the years.
Essentially, you may get a payout of up to 20% of your home’s equity value, if you’re lucky, and even then it’s less than the amount you’d get from a HELOC, with the payoff being that you won’t be making any monthly payments for the entire duration of the agreement.
However, some lenders like Unlock allow you to tap into $500k of your home’s equity value if the appraisal value is greater than $1.15M, but you will be required to give up 70% of your home’s future value in return for this opportunity.
Where can you get a home equity-sharing agreement
The opportunities available to you will depend largely on where you’re located, and even then, you should still carefully examine what each of the lenders offers, as you may find better options if you don’t settle for the first one that pops up.
So far, Unison has the largest geographic coverage in the US, and its services are available in 28 states and Washington D.C.
Despite this being a valid option to choose if you’re in need of some money, a HELOC may still be the safer one to go for, as you won’t be risking the possibility of not being able to repay the amount you’ve taken out once the agreement period comes to a close.
This option only caters to homeowners that plan to stay in their home for an extended period of time, or for their entire lives for that matter, as well as those that don’t fit the requirements for the other types of loans available on the market.
Additionally, you may lose the ability to refinance your home loan if you’ve entered a home equity sharing agreement, so consider all your other options before going into this one.