What you need to know about popular HELOC alternatives
With real estate prices rising in nearly every corner of the country, it’s natural to wonder if you should be tapping into some of the growing equity in your home. This is especially true if you bought your way into the housing market several years ago, or if you need money to meet rising gas and grocery prices, or to pay a major expense such as tuition fees or a swimming pool in your backyard.
A quick look at the numbers shows how much real estate equity many new buyers already have. A recent report from the National Association of Realtors (NAR) showed that the selling price of existing homes rose 15.4% to $350,300 in the year to January 2022. Not only that, but the selling price rose 6.7% in January 2022 over the prior month, meaning someone who bought a home in late 2021 likely locked into instant equity within a month.
Unfortunately, traditional lenders may not be as willing to offer home equity loans or home equity lines of credit (HELOCs) as they once were. This was especially true amid the pandemic when banks tightened requirements for all kinds of borrowing, but it may still be true for today’s buyers who have recently purchased their homes or don’t have a mortgage. considerable equity in their properties.
According to Federal Trade Commission (FTC), many lenders prefer to provide home equity loans and HELOCs to borrowers who own at least 20% of the equity in their home. For a home currently worth the January 2022 median sale price of $350,300, that means a borrower would likely need to owe much less than $280,240 to have equity to withdraw. Not only that, but there are income and credit requirements to meet, some of which can be high.
Alternatives to home equity
It’s no surprise that many companies have come up with innovative home equity products to help solve this problem for homeowners. These home equity alternatives are usually called home equity investment companies or share companies, but there are also sale-leaseback companies to be aware of.
With a sale-leaseback, the company actually buys your home and you rent it out until you’re ready to move out or want to buy it back (if that’s an option). Sale-leasebacks do not require the previous owner to make the mortgage payments, but they must pay rent.
Home Equity Sharing Agreements
With a home equity investment company or home equity sharing arrangement, homeowners receive an upfront cash investment in exchange for sharing a percentage of the future appreciation or depreciation of their home. This allows you to access some of the current equity in your property, without giving up ownership of your home.
A popular home equity investment firm called Unison promises a “smarter way to unlock your home’s equity, without interest, debt or monthly payments.” Available in 28 states plus Washington DC, Unison focuses on investments ranging from $30,000 to $500,000.
With the Unison HomeOwner program, the company’s initial investment can lead to ownership of up to 17.5% of the value of your home. This allows them to participate in the growth of your home’s value over time, although the company also shares the risk if your home’s value drops.
Letting Unison buy some of the equity in your home doesn’t mean you’re stuck in home ownership forever, either. You can sell your home at any time during the process, although Unison does not share any loss in home value if you sell it within three years (or five years in special situations).
The value of your home should theoretically increase in value within three to five years, in which case you can sell your home and repay Unison the amount owed to them when you close the property. This amount would include their initial investment plus any growth in the percentage of equity in your home that they have an equity stake in. That said, working with Unison requires a 3% set-up fee at closing, which adds to their profits without benefiting you in any way. way.
Other popular home equity investment firms include Homepage, Indicate, House and Noah. Each of these companies operates similarly, although they have different minimum and maximum investments, their own fee structures, and different levels of nationwide availability.
The pitfalls to know
Selling some of your home’s equity through a co-investment certainly isn’t the worst idea in the world, but you should consider the potential downsides before you jump in. Be sure to read the fine print before signing any type of contract, and pay attention for the following:
- Costs: REITs charge an upfront transaction or origination fee that can range from 2.5% to 5% of the amount of equity they purchase. This amount is usually deducted from the money you receive in exchange for the equity in your home.
- Hidden costs: You may also be responsible for additional expenses associated with assessing the value of your home and entering into the contract. For example, Unison says its clients are responsible for appraisal fees which typically range from $450 to $1,250 and settlement fees which range from $700 to $1,750.
- Risks: This type of investment requires you to use your home as collateral, just as you would with a home equity loan or HELOC. If you sell your home early in the process and it has lost some of its value, you may have to reimburse the home equity investment company for its losses.
Other strategies to consider
Letting one of these companies buy a percentage of your home’s equity can certainly make sense, and that’s especially true if your alternative strategy is to use a credit card to rack up long-term debt. Home equity investment companies charge upfront fees to get you access to the equity in your home, but the high interest rates charged by credit cards (currently over 16%) can make borrowing particularly costly in the long term.
With that in mind, you can also consider financing alternatives, including 0% APR credit cards that let you pay no interest on purchases for a limited time, typically up to 21 months. In the meantime, also consider borrowing with an unsecured personal loan, which can help you access the cash you need with a fixed interest rate, fixed monthly payment, and set repayment schedule.
Finally, interest rates are still low for mortgage products, so a cash refinance can help you access the equity in your home without taking out a second lien or giving anyone the right to an appreciation. future. You may be able to do a cash-out refinance with your current mortgage lender, but you can also shop around for a new mortgage to make sure you get the best rates and terms.
Home equity investment companies allow you to borrow money against the equity in your home if you need to, but they are far from the only option to consider.