If you are in the market for a home equity solution, you already know that your home represents a major source of wealth. That wealth can carry you through financial challenges and help you meet your financial goals. There are a great many tools out there purporting to help you tap into your home equity – however, not every tool works for every homeowner.
The Home Equity Investment has some unique features that make it an incredible fit for certain people, but as with other financial products, you’ll need to make sure it’s the best fit for you. This article will arm you with the tools you need to answer the following question: “Are Home Equity Investments worth it?”
What is a Home Equity Investment?
Let’s start with a quick review of the primary features of a Home Equity Investment.
With a Home Equity Investment – or an HEI for short – homeowners receive a lump sum cash payment in exchange for a share of their home’s future appreciation. Because an HEI is an investment, there are no monthly payments, and credit score requirements are more lenient than with more traditional financial products.
Your income is also not a factor in determining whether you qualify for a Home Equity Investment. While they will still review a few key factors about your finances, the Home Equity Investment company you work with is primarily assessing your property and whether or not a portion of your home value represents a sound investment.
HEIs come with a long term – up to 30 years with no prepayment penalty for those who wish to repay earlier.
Are Home Equity Investments worth it?
Whether an HEI is worth it depends on your financial situation and specific needs. You may wish to consider discussing your circumstances with a financial advisor, but here are some general guidelines to help you decide whether an HEI might be worth it for you.
When an HEI could be the best choice
An HEI can be a life-changing product for homeowners who need a different way to tap into their home equity wealth. Here are some scenarios where an HEI may be the best option:
- You need (or want) to avoid a monthly payment – For homeowners looking to maximize their cash-flow, or those living on a fixed income, it may be highly undesirable to add a monthly payment.
- You need to eliminate high-interest debt – If you are underwater on high-interest products such as credit cards or bad-credit personal loans, paying off these bills with an HEI can reduce both stress and overall cost.
- You are having trouble qualifying for a conventional home equity product – Traditional products like HELOCs can be challenging to qualify for if you are facing a period of financial hardship, which is exactly when you may wish to take advantage of your home wealth.
- You value flexibility and convenience – Because an HEI comes with a 30-year term and no prepayment penalty, you are free to repay on your own schedule, when it works best for you.
- You’ve been feeling cash-poor and asset-rich – An HEI could be a good fit if you’re looking to pull some of the cash out of your home and make it work for you today.
When an HEI might not make sense
While an HEI is an advantageous product in many situations, there are some homeowners for whom it’s not the best fit. You may want to consider other options if:
- You value having a predictable cost – Because HEI repayment is based on the value of your home and how it changes over time, you will not know exactly how much your HEI costs until the time comes to pay it back.
- You are more comfortable making a monthly payment – HEIs are repaid with one balloon payment, which means that you are responsible for planning how you will pay.
- You don’t want to share a portion of your home equity – A home is a personal, emotional thing, not just an investment. You may not wish to have another party share in the proceeds of your personal sanctuary.
- You are looking for the lowest overall cost – If you are looking for the cheapest possible way to get cash, and can qualify for a HELOC or cash-out refinance with a favorable rate, one of those products may be a better fit for your needs
What can you use a Home Equity Investment for?
Once you receive your HEI funds, there are generally no restrictions on how you can use your funds, although you may be required to pay off certain debts with a portion of your proceeds at closing. You likely already have a purpose for the funds in mind if you are investigating HEIs, but here are some popular options:
Top uses for HEI funds
- Eliminating high-interest debt, such as credit cards or personal loans
- Renovating and maintaining your home, including tackling deferred maintenance
- Covering retirement shortfalls
- Paying for education (for yourself or your children)
- Starting or growing your business
- Bolstering your emergency fund
How is a Home Equity Investment like other equity products?
Home Equity Investments (and other home equity sharing agreements) have some key similarities with more conventional financial tools, such as cash-out refinances, home equity loans, and home equity lines of credit.
Fees and costs
Like other home equity products, HEIs come with closing costs and fees. These ranges vary slightly depending on the company you work with, so make sure you do your due diligence on fees to avoid surprises.
Process
The HEI process should look very familiar for any homeowner who has gotten a mortgage or another form of debt secured by their home. It looks something like this:
- Prequalification – You’ll provide basic information about yourself and your home to receive a preliminary offer.
- Application – If you like what you see, you can continue to a full application, where you’ll answer more in-depth questions and consent to a credit check.
- Underwriting & appraisal – The information you provided will be verified, and the value of your home will be confirmed, leading to your final offer.
- Closing – If you’re happy with your offer, you’ll sign closing documents and disclosures with a mobile notary.
- Funding – You’ll receive your HEI funds via wire transfer.
Funding timeline
Since the process is similar to a traditional mortgage, the financing timeline is also similar. Homeowners can expect to receive their funds in 30-40 days, depending on factors such as the complexity of the title report and your responsiveness to underwriting requests.
How is a Home Equity Investment different from other equity products?
While there are numerous similarities between HEIs and lines of credit, HELOCs, and other equity products, there are also key differences.
Requirements
The qualification requirements are much more flexible than those of a more traditional product. While these vary from HEI provider to HEI provider, you can generally expect to need the following:
- 500+ credit score
- Home value of $250k+ on a qualifying property type
- Plenty of home equity
- No income/DTI requirements
Repayment
The biggest difference with a Home Equity Investment comes in the repayment stage of the process. Instead of making a monthly payment with interest to the bank, you pay nothing until you reach the end of your HEI term or decide to sell your home or prepay.
Unlike with a conventional loan, how much you owe is determined by your home value. You’ll pay an agreed-upon percentage of the change between your home’s starting and final value at the time of repayment.
Most homeowners repay through either a home sale or a cash-out refinance.
Impact on heirs
Certain home equity products, notably the reverse mortgage, come due when the homeowner on title passes away, leaving heirs scrambling to either sell or refinance the property. Like a traditional mortgage, the HEI is assumable, meaning that heirs inherit the contract and have the remaining term to pay it back.
Final thoughts
Homeowners looking to cash in on their home’s equity have more options today than ever before. It’s crucial to do your due diligence and make sure that you’re choosing the correct financial product for you. Hopefully, you now feel equipped to answer the question, “Are home equity investments worth it?”
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