In the vast landscape of financial choices, unlocking the potential of your most substantial asset – your home – can seem like a puzzle. How do you balance your need for cash today with the monthly payments, interest rates, and loan terms of tomorrow? In addition to familiar options such as the HELOC, home equity loan, or cash-out refinance, there’s a home equity tool you should know: the Home Equity Investment (HEI).
Depending on your specific financial scenario and requirements, an HEI could be the key to unlocking your home's equity. In this guide, we’ll cover all the basics of Home Equity Investments and help you decide whether an HEI could be the right fit for you.
Whether you're looking to finance home improvements, consolidate debt, or are just curious about this financial option, let's explore the potential of tapping into your home equity through an HEI.
What is a Home Equity Investment?
The constraints of traditional financing – such as strict credit score requirements, monthly payments, and income verification – don’t work for everyone. That's where a Home Equity Investment (HEI) comes in. An HEI is different from a traditional loan. Instead, it’s an option agreement that gives you cash from your home equity today for a share of your property's future value.
Let’s start by defining home equity. Home equity is the difference between your home’s current value and the remaining balance on your mortgage. If your home is worth $700,000 and you owe $200,000 on your mortgage, that means you have $500,000 in home equity. The more of your mortgage you pay off, the more equity you build.
Traditionally, homeowners have been able to take on debt secured by this equity through tools such as a HELOC or a cash-out refinance. While the terms of all these financing options vary, the core idea is the same: You get the funds you’re looking for, and in exchange, you make a payment every month.
Home Equity Investments offer homeowners a different option for equity release. Instead of taking on new debt, you partner with a company like Point – similarly to the way a startup partners with an equity investor. You unlock your home equity – without the usual monthly payments and income verification process.
Instead of making a monthly payment, you repay your Home Equity Investment in one lump sum at any time during the duration of your term, typically 30 years. Most homeowners choose to repay when they sell their home or get a cash-out refinance.
Qualification is also different from a traditional loan. While your credit score is still considered, the requirements are more lenient than with conventional lending.
How does a Home Equity Investment work?
Picture an HEI as a partnership.
Here's how it works:
Step 1: First, you prequalify and then complete an online application. The company you’re partnering with, like Point, assesses your property's value and its potential for future appreciation. They’ll look at your home’s location, your equity position, and a few key financial factors – such as credit score (homeowners may qualify with a score of 500 and up), liens, and recent bankruptcies.
Step 2: Once the property is approved, you agree on the investment amount. You receive receive a lump sum cash payment, and in return, you agree to share a portion of your home's future appreciation.
Step 3: You enjoy the benefits of your home equity! You are free to finance home improvements, consolidate debt, or make significant purchases – or anything else you would like.
Step 4: Fast forward to when you decide to sell your home, when the term of the agreement comes to an end (typically 30 years), or any other time you want to pay back your HEI. You repay the initial investment amount, plus a share of the appreciation. If your home's value has gone down, some HEI agreements ensure that the investment company shares in a portion of the loss.
Home Equity Investment pros and cons: weighing the options
Depending on your financial needs, the Home Equity Investment could be exactly what you are looking for. However, it’s not the right fit for everyone – let’s discuss some of the pros and cons of HEIs.
The pros of a Home Equity Investment
1. No monthly payments: One of the biggest selling points of an HEI is that it doesn't come with any monthly payments. This helps homeowners who choose the Home Equity Investment improve their cash flow.
2. No need for perfect credit: While Home Equity Investment companies such as Point still check your credit, homeowners with a wide range of credit scores can qualify. Point works with homeowners with credit scores of 500 and up.
3. No income requirements: Your income and DTI (debt-to-income ratio) are not considered as part of the application process.
4. Large check size: Depending on your home value and equity position, you can get up to $500k with a Home Equity Investment – or as little as $25k. This provides you with the flexibility to meet your financial needs.
The cons of a Home Equity Investment
1. Sharing future appreciation: The trade-off for accessing your home's equity now is that you'll need to share a slice of your home's future value later. If your property appreciates significantly over time, this could mean repaying substantially more than you received. This can make the HEI more expensive than other options.
2. Longer application timeline: Because the Home Equity Investment is a home equity product that requires an appraisal and a clean title, it can take longer to qualify for an HEI than it would for some other products, such as personal loans.
3. May not be available to all homeowners: Depending on a home’s location, equity, and other factors, not all homeowners will be eligible for an HEI.
4. Fees: Like traditional lending products such as HELOCs and cash-out refinances, HEIs come with their own fees. Make sure you understand these thoroughly before making a decision.
Home Equity Investments for investment properties
Getting a home equity loan on investment property can be a more challenging and rigorous prospect than tapping the home equity of your primary home. There is a greater perceived risk for the lender, which makes for higher credit score and income requirements for investment property HELOCs and home equity loans.
While there are slight differences in terms of pricing and qualification criteria, Point’s HEI is available for investment properties. Not all Home Equity Investment companies offer HEIs for second homes, so do your research before starting an application.
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FAQs about Home Equity Investments
If you’re learning about HEIs, you probably have more questions. Let’s discuss Home Equity Investment FAQs.
What are the requirements for a Home Equity Investment?
Qualification requirements vary between Home Equity Investment companies. Here’s what you’ll need to be eligible for a Home Equity Investment from Point:
- Sufficient equity in the home (at least 30% after the investment)
- Eligible property type and location
- Home value above $250k
- Credit score above 500
How much does a Home Equity Investment cost?
While there are no monthly payments, Home Equity Investments come with certain costs. These can include:
- An origination fee (3.9-5%, depending on your HEI provider)
- An appraisal fee
- A processing fee
These are generally paid from the proceeds of your investment, limiting your out-of-pocket costs. After these initial costs, you will not pay anything for the duration of your term – up to 30 years if you get an HEI from Point, but 10 years with many other Home Equity Investment companies.
When you eventually sell your home or the agreement term ends, you'll repay the initial investment and share your home's appreciation. Unlike a traditional loan, you won’t know exactly how much you need to repay until the moment comes. With an HEI from Point, your repayment amount will be calculated based on the difference between the agreed-upon starting value of your home and your home’s final value. Other HEI companies may take a cut of the entire total value of your home rather than a percentage of your appreciation.
With Point, your HEI repayment is capped in the event of massive home appreciation. We’ve built an interactive pricing example to help better understand how we calculate the costs.
How do you repay a Home Equity Investment?
Repayment of a Home Equity Investment typically happens when you sell your home, when you refinance, or when the term of the agreement ends. You can also repay from your cash savings or any other source of funds. Point’s HEI has no prepayment penalty, so you can repay at any time during the life of your 30-year term. While repayment is a little more complicated than a monthly payment to a lender, it’s a fairly straightforward process that varies slightly depending on your repayment method.
Is a Home Equity Investment a good idea?
As with any financial product, this depends on your unique financial circumstances. If you want to access your home equity without increasing your debt or monthly payments, and you're comfortable sharing potential future appreciation of your home, a Home Equity Investment could be a solid choice. If you’re considering unlocking your home equity, make sure to weigh the pros and cons of Home Equity Investments, compare with other home equity products, and make the best decision for your unique situation.
What is the difference between a HELOC and a Home Equity Investment?
While both a HELOC and a Home Equity Investment (HEI) are great ways to unlock your home equity, they work in very different ways.
- A HELOC is a revolving line of credit, similar to a credit card except secured by your home. You pay down your HELOC balance with monthly payments until it is paid down, and can draw up to your borrowing limit as necessary.
- An HEI provides you with a lump sum of cash from your home equity in exchange for a share of your home’s future appreciation – that means you make no monthly payments for the duration of your 30-year term.
The qualification requirements are also very different – a HELOC requires good-to-excellent credit and a strong income, while an HEI has no income requirements and can be an option for homeowners with imperfect credit.
On the flip side, the costs of a HELOC are much more predictable. With an HEI, you won’t know how much you owe until it’s time to repay.
Taking the next steps with your home equity
If a Home Equity Investment sounds like a good option for you, the next step is to check your eligibility and see how much you can get. There is no obligation to move forward after seeing if you qualify. Do your due diligence and compare Home Equity Investment companies, and don’t hesitate to reach out to our team if you have any questions.
Your home equity is one of your most important assets – leveraging it responsibly can provide a smooth path to fulfilling your financial goals, whether you’re looking to pay off high-interest debt, retire comfortably, renovate your home, or anything else.
