What You Should Know About Popular HELOC Alternatives

What You Should Know About Popular HELOC Alternatives

With housing prices on the rise in nearly every corner of the country, it’s only natural to wonder if you should tap into some of your growing home equity. This is especially true if you bought your way into the housing market several years ago, or if you need cash to keep up with the rising price of gas and groceries, or to pay for a large expense like college tuition or a backyard pool.

A quick look at the numbers shows how much home equity many new buyers already have. A recent report from the National Association of Realtors (NAR) showed that the sales price for existing homes rose 15.4% to $350,300 during the year leading up to January 2022. Not only that, but sales price rose by 6.7% in January 2022 from the prior month, meaning that someone who purchased a home at the end of 2021 probably locked in instant equity within a single month’s time.

Unfortunately, traditional lenders may not be quite as willing to offer home equity loans or home equity lines of credit (HELOCs) as they once were. This was especially true in the midst of the pandemic when banks tightened requirements for all kinds of borrowing, but it may still be true for buyers today who recently purchased their homes or don’t have considerable equity in their properties.

According to the Federal Trade Commission (FTC), many lenders prefer to extend home equity loans and HELOCs to borrowers who have at least 20% in equity in their homes. For a house that is currently worth the January 2022 median sales price of $350,300, that means a borrower would likely need to owe considerably less than $280,240 to have any equity to pull from. Not only that, but there are income and credit requirements to meet, some of which may be steep.

Home Equity Alternatives

Not surprisingly, quite a few companies have come up with innovative home equity products meant to help solve this issue for homeowners. These home equity alternatives are typically referred to as home equity investment or sharing companies, yet there are also sale leaseback companies to be aware of.

The Sale-Leaseback

With a sale leaseback, the company actually purchases your home and you lease it from them until you’re ready to move or you want to buy it back (if that’s an option). Sale leasebacks don’t require the prior homeowner to make the mortgage payments, but they do have to pay rent.

Home Equity Sharing Agreements

With a home equity investment company or home equity sharing agreement, homeowners receive an upfront investment of cash in exchange for sharing a percentage of their home’s future appreciation or depreciation. This lets you access some component of the current equity you have in your property, yet you don’t have to give up ownership of your home.

One popular home equity investment company called Unison promises a “smarter way to unlock the home equity you already own, without interest, debt, or monthly payments.” Available in 28 states plus Washington D.C., Unison focuses on investments that range from $30,000 all the way up to $500,000.

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With the Unison HomeOwner program, the company’s initial investment can lead to the ownership of up to 17.5% of the value of your home. This lets them have a stake in the growth of your home’s value over time, although the company also shares in the risk if the value of your home drops in value.

Letting Unison buy some of your home equity doesn’t mean you’re stuck in the property forever, either. You can sell your home at any time during the process, although Unison will not share in any loss in the value of the home if you sell it within three years (or five years for special situations).

The value of your home should theoretically rise in value within three to five years, in which case you can sell your house and pay back Unison the amount they are owed when you close on the property. This amount would include their original investment plus any growth on the percentage of your home’s equity they have a stake in. That said, working with Unison does require an origination fee of 3% at closing, which adds to their profits without benefitting you in any way.

Other popular home equity investment companies include Hometap, Point, Haus and Noah. Each of these companies work similarly, although they have different minimum and maximum investments, their own fee structures, and different levels of availability nationwide.

Pitfalls To Be Aware Of

Selling some of your home equity through co-investing is definitely nor the worst idea in the world, but you should consider potential disadvantages before you dive in. Make sure to read over the fine print before you sign any type of contract, and watch out for the following:

  • Fees: Home equity investment companies 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 typically deducted from the cash you receive in exchange for your home equity.
  • Hidden Costs: You may also be responsible for additional expenses involved in assessing the value of your home and closing the contract. For example, Unison says their customers are responsible for appraisal fees that typically range from $450 to $1,250 and settlement costs that range from $700 to $1,750.
  • Risks: This type of investment requires you to use your home as collateral, just like you would with a home equity loan or a HELOC. If you sell your home early in the process and it has lost some of its value, you may wind up having to pay the home equity investment company back their losses.

Other Strategies To Consider

Letting one of these companies buy a percentage of your home equity can definitely make sense, and that’s particularly true if your alternative strategy is using a credit card to rack up long-term debt. Home equity investment companies do charge upfront fees to let you access your home equity, but the high interest rates credit cards charge (currently over 16%) can make long-term borrowing especially expensive.

With that in mind, you can also consider funding alternatives, including 0% APR credit cards that let you skip interest on purchases for a limited time, usually up to 21 months. In the meantime, also look into borrowing with an unsecured personal loan, which can help you access the cash you need with a fixed interest rate, a fixed monthly payment and a set repayment timeline.

Finally, interest rates are still low for mortgage products, so a cash-out refinance can help you access home equity without taking out a second lien or giving anyone rights to future appreciation. 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’re getting the best rates and terms.

Home equity investment companies make it possible to borrow money against the value of your home if you need it, but they’re far from the only option to consider.

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