As a homeowner looking to tap into your equity, you have more options today than ever before. Home Equity Investments and other similar products, sometimes called home equity agreements, allow homeowners to unlock their equity with no monthly payments, no income requirements, and more flexible credit score requirements.
However, because the cost of a Home Equity Investment depends on the final value of your home, understanding repayment can feel a little more complicated. Additionally, every HEI company uses its own calculations to determine pricing. There are two main categories in terms of pricing: share of total value and share of appreciation. We’ll go into detail about these pricing structures, as well as the basics of repaying a Home Equity Investment.
How repaying a Home Equity Investment works
One of the key benefits of an HEI is that you will never have to worry about a monthly payment. You have the duration of your term to enjoy your funds. However, like any other financial agreement, there comes a time when you need to repay your investment.
Repaying an HEI is less straightforward than repaying a traditional loan, where your cost is determined by dividing the principal amount over the term length and applying an interest rate. This is because the cost of an HEI is determined by your home’s value at the time of repayment.
Every Home Equity Investment company uses this number – the ending value of your home – to calculate your pricing. However, different companies have different calculations. There are two main categories for pricing: share of total home value and share of appreciation.
With companies that share in the appreciation of your home, most of the starting value of your home is protected from equity sharing. Meanwhile, companies that share in the total home value take a cut of the entire value of your home, starting from zero. Let’s go into some more detail to help you understand how these two pricing systems work.
Share of appreciation
You’ve owned your home for a long time, and you built all that equity alone. HEI companies using the share of appreciation model, such as Point, believe that you deserve to keep the lion’s share of the equity you built before the start of the partnership.
When Point calculates the final cost of your HEI, we protect most of your home’s starting value. Nothing below the appreciation starting value is factored into the repayment. We only share a piece of the pie – the majority of the pie remains wholly yours, for you to use however you would like.
Say you took out a Point HEI for $80,000 with an $800,000 home. Your HEI percentage – the portion of your home appreciation shared with Point – was around 24%. When you go to repay your HEI 10 years later, your home value has grown and your home is worth $975,000.
Your total repayment cost is $175,000 – that original $80,000, and 24% of your home’s change in value from the $584,000 Point agreed to protect at the start of the agreement – or $95,000.
Share of total value
Companies using the share of total value model, as the name suggests, share a percentage of the whole value of your home. None of your home value is protected from the agreement.
Say you took out an HEI with a share of value company – also $80,000 from an $800,000 home. With a share of value company, your HEI percentage is typically lower – for the purpose of this example, it would likely be around 20%.
When you repay in 10 years, you’ll share 20% of the whole value of the home – none of the starting value is protected. That means you will owe $195,000. Even though the HEI percentage is smaller, your repayment amount is $20,000 greater. This is because you are sharing a piece of the whole pie.
Point’s Homeowner Protection Cap
With Point’s HEI, homeowners are protected in multiple ways. You keep most of your starting equity for yourself, and we also protect you from sharing too much in the event of very high home appreciation.
If your home value explodes, we’ll apply an annualized percentage to limit how much of your home wealth you share with Point. We’ll always calculate your HEI costs two ways, using your HEI percentage and our cap. No matter what, you will always owe the smaller of the two numbers.
Final thoughts
While multiple HEI companies offer financing to homeowners looking to tap into their home equity, only Point’s HEI comes with both a share of appreciation model and our unique Homeowner Protection Cap. Make sure you understand all aspects of any HEI offer you receive, including share of appreciation and share of total home value.
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