Home Equity Investments, also known as HEIs, can be a game-changer for homeowners looking to capitalize on their property's value. Home Equity Investments provide homeowners with a way to tap their home wealth without stringent credit requirements and costly monthly payments. However, as with anything, an HEI has pros and cons. We'll unpack how Home Equity investments work, the advantages and challenges, and how to tell if an HEI is the right solution for you.
Key takeaways
- A Home Equity Investment (HEI) provides homeowners access to cash in exchange for a share of the home’s future appreciation.
- One of the biggest pros of a home equity investment is that there are no monthly payments, which can offer breathing room during cash-flow-constrained periods.
- HEI requirements are less stringent and can be useful for homeowners with irregular income or low credit scores.
- Home equity investment pros and cons depend heavily on how long you stay in the home. The longer the home appreciates, the more important it is to understand how value sharing works at settlement.
- Home equity investments are not ideal for every homeowner. Those who prefer predictable repayment may want to compare alternatives.
First, what is a Home Equity Investment?
A Home Equity Investment is a financial agreement that allows homeowners to tap into the equity in their homes in exchange for a share of their home’s future appreciation. To understand a Home Equity Investment, you first need to understand home equity.
Home equity is the part of your home that you truly own — the difference between your home’s current value and any debts you owe on the property, such as your first mortgage. You build equity in your home through appreciation, home improvements, and steady mortgage payments.
There are many different financial tools available to homeowners looking to leverage their equity, such as HELOCs, cash-out refinances, and home equity loans. A Home Equity Investment differs from these solutions because it is an equity product and not a form of traditional debt financing.
This means that when you receive a Home Equity Investment, you do not make monthly payments. Instead, you repay your HEI in a lump-sum payment when you sell your home, refinance, or use another source of funds.
Home Equity Investment pros and cons
Like any other financial tool, an HEI is not the right fit for everyone. Let’s discuss the pros and cons of Home Equity Investments to help you figure out if this financial solution is right for you.
Pros of a Home Equity Investment
Less stringent requirements
Since an HEI is an investment in your home, your finances can be less important than the property in question. This means you may be eligible for a Home Equity Investment even if you don’t qualify for home equity lines of credit (HELOCs) or home equity loans. Homeowners can qualify for an HEI with:
- A credit score above 500
- No/low income
- Debt-to-income ratio (DTI) is not typically taken into account
No monthly payments
Once you receive your HEI funds, you don’t have to worry about monthly payments. You owe nothing until your term is over — or you decide to sell your home or repay early. This means you can maximize your monthly cash flow.
Access to a large lump sum of cash
Depending on your home value and how much equity you have, you can get up to $600k with a Home Equity Investment.
No restrictions on use of funds
You can use your HEI funds for anything you need. Common ways homeowners use their equity include:
- Paying off high-interest debt
- Renovating your home
- Funding a business
- Covering educational expenses
- Building a safety net
Your home wealth is yours to use as you see fit.
Long repayment term
Different HEI companies have different term lengths for their products – generally 10 or 30 years. A Home Equity Investment from Point comes with a flexible, 30-year term. That means that if you choose, you’ll pay nothing for up to 30 years. There are no prepayment penalties, so you can repay your HEI on your own schedule.
Second properties can be eligible
Depending on the HEI company, you may be able to get an investment on a rental property or second home, albeit with stricter qualification requirements. Getting a home equity loan on investment properties can be challenging, so this provides a compelling option for owners of multiple homes.
Cons of a Home Equity Investment
No financial product is the right fit for every consumer. These are some things to keep in mind when considering a Home Equity Investment.
Sharing future appreciation
When you take out a Home Equity Investment, you are agreeing to share the future appreciation in your home with an investment company. That means you will have to give up part of the proceeds when you sell your home or take out a cash-out refinance.
Longer application timeline
While there are some financial products you can take out quickly, such as a credit card or a personal loan, an HEI is tied to a thorough investigation of your home’s value and title. That means an HEI takes longer to fund than an unsecured product.
Not available for every location/property type
Since Home Equity Investments are a newer product, they are not available to homeowners nationwide. You’ll need to confirm the eligibility of your location. You’ll also need an eligible type of property – certain home types, such as manufactured homes or farms on large acreage, cannot qualify for an HEI.
Risk of foreclosure
Like any product secured by your home, if you fail to repay your HEI, you may face the risk of foreclosure.
Uncertain costs
Unlike a loan, you won’t know exactly what you owe until you get ready to repay. The cost is tied to the value of your home, and you cannot predict how much your home will appreciate. Some companies, including Point, include protections that prevent you from repaying too much if your home appreciates immensely.
When is a Home Equity Investment a good idea?
While a Home Equity Investment is not the right fit for all homeowners looking to tap into their equity, it might be a good fit for you if:
- You can’t – or don’t want to – make a monthly payment.
- Your income or credit disqualifies you from traditional financing solutions.
- You’re looking for a large, lump sum payment to cover a major life expense.
- You want the flexibility of paying back any time during a 30-year term.
It’s a powerful tool in the home equity arsenal of many homeowners. To find out if a Home Equity Investment might be right for you, you should first see if you qualify. Be sure to compare and contrast with other financing options to make sure you make the best decision for your financial needs.
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Frequently asked questions
What is the downside of a Home Equity Investment?
A Home Equity Investment (HEI) allows homeowners to access their equity without taking on monthly payments, but there are some downsides to consider. First, an HEI is secured by your home, meaning there's a risk of foreclosure should you fail to repay it. Additionally, the total repayment amount depends on your home's value when you decide to pay the HEI back, making it harder to predict your long-term cost. Finally, Home Equity Investments aren't available in every state or for every property type, so eligibility may be limited.
How do you pay back a Home Equity Investment?
Homeowners can pay back their HEI anytime during the flexible term when they sell the home, refinance, or use another source of funds (cash reserve, HELOC, home equity loans, etc.). Instead of a fixed monthly payment or interest rate, the repayment amount is based on the home's market value at the time of settlement. This structure offers flexibility but requires homeowners to plan ahead for repayment.
What happens if my home value decreases?
If your home’s value decreases, the amount you owe on a Home Equity Investment could possibly be lower than what you originally received. Since the HEI company shares in both appreciation and depreciation, they take on part of the risk.
Can you refinance, get a HELOC, or take out a home equity loan with an HEI?
Yes—it’s possible to refinance, take out a home equity loan, or get a HELOC with a home equity investment (HEI), but there are a few important considerations. Other lenders typically have equity and lien requirements that must be met first, which means the HEI may need to be settled using the proceeds of the new loan or refinance. Whether that’s required depends on the lender and your available equity, so homeowners should factor this into their planning when considering future financing options.
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