What Is a Home Equity Investment? A Creative Yet Risky Way To Turn Your Home’s Value Into Cash

As the costs of daily life continue to rise, homeowners are searching for new and creative ways to access cash and tap into their home equity without incurring steep borrowing costs. One option that has recently gained popularity is a home equity investment (HEI), also known as a home equity sharing agreement. While HEIs may seem like an attractive option for those with bad credit or high debt-to-income ratios, there are significant strings attached.

What Is a Home Equity Investment?

When you agree to a home equity investment, you essentially allow an investment company to buy a portion of your home equity in exchange for cash. Unlike home equity loans and HELOCs, there are no monthly payments or interest rates to worry about. HEIs are liens against your property that allow you to sell a portion of your home today for cash.

For example, if an investment company buys a 15% stake in your home equity and your home is worth $200,000, you would receive a $30,000 lump sum. The investment company will stipulate how long its stake lasts and how much you’ll be required to pay back at the end of the agreement term. In most cases, homeowners will have to pay back the original lump sum plus a percentage of the home’s appreciation over the term of the contract.

The Payback Process

If your home appreciates, you’ll have to pay back more to the investment company. Let’s say your HEI is a 10-year contract, and your home’s value goes up 3% per year. At the end of the contract term, your home will be worth $268,783. You’ll have to pay back the original investment plus the investor’s 15% stake in your home’s appreciation, which would amount to $40,317. If you can’t pay back the appreciated amount, the investor can force the sale of your home.

The Pros of a Home Equity Investment

The most obvious advantage of HEIs is getting your hands on cash immediately, even with bad credit. This might be attractive to homeowners who are house-rich but cash-poor with a credit score lower than 620. HEIs don’t come with any additional monthly obligations like traditional loans. Additionally, you don’t have to worry about interest rates or credit score requirements.

The Cons of a Home Equity Investment

One of the major disadvantages of HEIs is that the fees associated with them are high. They are typically more expensive than home equity loans or HELOCs, and the investor may take a large portion of your home’s appreciation. You’ll also need to pay back the investment company in addition to interest on the remaining equity you still own in your home. If your home value doesn’t appreciate as expected, you could end up owing more than the value of your home.

Related Facts

• HEI contracts typically last 10 to 30 years.
• Investment companies may stipulate how you can use the cash from the HEI.
• Some HEI agreements are uncapped, which means there’s no limit to the amount you’ll need to pay back at the end of the contract.

Key Takeaway

HEIs may be a creative way to access cash and tap into your home equity, but they come with significant risks. Before entering into a contract, make sure you understand the terms and fees associated with the agreement. Consider other options for accessing cash, such as home equity loans or HELOCs, before committing to an HEI.

In Conclusion

While home equity sharing agreements may seem like an attractive option for homeowners with bad credit or high debt-to-income ratios, they come with high fees and significant risks. Ensure you fully understand the terms and fees associated with HEIs before committing to one. Consider other options for accessing cash before taking out an HEI.