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Should I Take Out a Home Equity Investment?
Q: I’m looking to use my home’s equity and an option I’m considering is a home equity investment. Is this newer option a good idea?
A: There’s a new kid on the block of home equity. Move over, Home Equity Lines of Credit (HELOCs) and Home Equity Loans (HELs); it’s time to make room for the Home Equity Investment (HEI). Let’s take a look at this relatively new way to use your home equity, how it differs from other options and whether it can be a good idea for your personal circumstances.
What is a home equity investment?
An HEI is an investment in your home’s future appreciation (or depreciation). Instead of taking out a line of credit or loan against your home’s current value, you’ll partner with an investor who will give you funds up front in exchange for a share in your home’s future value. There are several investment companies offering it, and each uses their own method for calculating the amount of funds you’ll get, as well as the amount you’ll pay them later. In general, though, you’ll receive a percentage of your home’s current equity in exchange for a larger percentage of your home’s future equity.
How does an HEI differ from a HELOC or HEL?
There are several significant differences between HEIs and the more common home equity options. Here’s how they stack up:
| Home Equity Investment | Home Equity Line of Credit | Home Equity Loan | |
| Distribution of Funds | One lump sum. | Withdraw as needed during “draw” period. | One lump sum. |
| Eligibility Criteria | No credit check or income requirements; must have sufficient equity in home. | Must have good to excellent credit, plus a favorable debt-to-income ratio and sufficient equity. | Must have good to excellent credit, plus favorable debt-to-income ratio and sufficient equity. |
| Payback | No monthly payment. One lump sum, amount varies according to home value at time of payback. | Monthly payments begin immediately, or after the draw period ends; amount changes in tandem with amount withdrawn. | Fixed monthly payments of principal plus interest begin immediately and are stable throughout the loan term. |
What are the benefits of a home equity investment?
For many homeowners, the HEI model offers a few unique advantages:
- No credit check. This can make a home equity investment the option of choice for homeowners who have fair or poor credit.
- No income requirements. A homeowner who does not have verifiable proof of income may not be eligible for a HELOC or HEL. However, with enough equity in their home, they can take out an HEI.
- No monthly payments. An HEI allows you to access cash without increasing your monthly debt burden.
- No interest changes. An HEI is not a loan and has no interest. There’s no need to worry about fluctuating interest rates with an HEI.
What are the drawbacks of a home equity investment?
Here are some significant downsides of HEIs to consider:
- Potentially high long-term cost. If your home appreciates a lot, it also means a bigger payout to the investor.
- Lump-sum repayment. An HEI must be repaid all at once at the end of the investment agreement. Most home investment companies have a cap on the amount they can collect in case of a huge jump in equity, but there will generally be a significant amount to repay in one shot.
- Shared equity in your home. When you take on an HEI, the investor becomes a stakeholder in your home. This could complicate things if you wish to sell or refinance before the investment term ends.
Should I take out a home equity investment?
Deciding whether to take out a Home Equity Investment depends on your financial situation, future plans and how you feel about sharing your home’s potential appreciation. Here are a few questions to consider:
- Are you struggling with monthly cash flow? If you need funds now, but can’t afford additional monthly payments, an HEI can provide relief without adding to your financial burden.
- Would you qualify for a more traditional way of tapping into your home’s equity? If you wouldn’t qualify for a HELOC or a HEL, you may be more inclined to consider an HEI.
- Do you expect your home’s value to appreciate significantly? If your home is likely to strongly increase in value, a HEI could end up being more expensive than a traditional loan.
- Do you plan to stay in your home long-term? If you expect to sell or refinance soon, a loan or HELOC may be a cheaper alternative.
Use our guide to make an informed decision about HEIs. If you have any questions or concerns please reach out to Forrest Ridley (fridley@mscu.net), our very own Mortgage Innovations Officer!
