According to the Federal Reserve, homeowners in the United States have a record $18.7 trillion in home equity. Opportunists have been busy establishing investment companies to “assist” you in accessing that equity. The home equity investor is a new breed of financial investor willing to buy that equity, offering you an innovative (tongue in cheek) way to access your equity with no loan and no payments! Homeowners be cautious!
Recently, a potential client asked us about a shared appreciation mortgage, which is another way we have seen this option being addressed. Then we heard a Dave Ramsey radio broadcast, where a gentleman called in to ask about a shared appreciation mortgage, or SAM. Dave and Chris Hogan both were amazed that this concept has popped up again, as they had not heard of it for many years. Their reaction to SAM was so negative that we thought it might be helpful to clue you in to just what it is.
First and foremost – the shared appreciation mortgage (SAM) company is an investor, not a lender. As of 2021, the four best-known home equity investors out there are Hometap, Point, Noah and Unison. The concepts are fairly similar, first you need plenty of equity in your home. Point requires 30 percent or more, Hometap is 25 percent, Noah is 25 percent and Unison is 20 percent. Next, you will need to live in one of the states where that investor does business (red flag). Since this product is not a loan, there’s no monthly payment, however, your new partner gets a claim on the appreciation of your home that is due when you sell or the term of your investment ends, whichever comes first.
One scenario might be:
- Home’s value: $500,000
- Point’s discounted value: $425,000
- Sale price five years later: $608,300
- Appreciation: $183,300
- Point’s 20 percent cut: $36,600
- Effective interest rate: 1 percent
- By contrast: Rates on home equity lines of credit have fallen as low as 4.25 percent
There is usually an investment time period from these investors, with Hometap the investment must be settled in 10 years or less. Should you choose not to sell your home, you will need to find an alternate funding source to settle your account. If you cannot find that source, you may be forced to sell your home – maybe at a loss. This is the real structure of these programs – they are a purchase transaction of your equity and you MUST buy it back at market value.
Home equity sharing just doesn’t seem right. If you feel this is an option for you, do your due diligence and/or let your Fee-Only CFP® professional assist in your decision.
Have a great weekend!