What is a home equity investment, and how much do you pay back at the end?

Summary

A home equity investment is a contract that pays you cash now in exchange for a share of your home's future value. There are no monthly payments and no interest, and you settle in one lump sum when you sell or when the term ends, usually 10 to 30 years out. What you owe is typically the smaller of the company's share of the home's value and a cap, and the CFPB found that under many contracts the amount grows 19.5% to 22% a year in the early years.

One contract, followed year by year

The CFPB's example is a homeowner with a $500,000 house who takes $50,000, or 10% of its value, in return for 20% of its future value. The contract caps the payoff at a 20% annual return on the $50,000. If the house gains 6% a year, the CFPB puts the settlement at $86,400 in year three and $179,085 in year ten.

Run the same assumptions through the years in between and you can see which limit is doing the work. In year five, 20% of the house would be $133,823 and the cap is $124,416, so the homeowner owes $124,416. In year six the share, at $141,852, has dropped below the cap of $149,299, and from then on the payoff grows only as fast as the house does. (The year-five and year-six figures are our arithmetic on the CFPB's assumptions.) The CFPB's own reading of the example is that the cost "is 20% per year for the first five years," and by year ten it works out to the equivalent of a no-payment loan at 14% a year. The earlier you sell, the higher the rate you settle at.

Some contracts shift the math further by starting from a lower value. The CFPB describes a company setting the starting value 25% below the appraisal. Point says its "appreciation starting value will be a majority percentage of this appraised value," which means its share of any gain is measured from a lower base. Point also says that if the home falls below that starting value, it "will share in the loss."

Different names for the same product

Companies sell these as home equity investments, home equity agreements or shared equity agreements. The CFPB groups them under one name, home equity contracts, and calls them "complex financial contracts that can be difficult to understand," noting that companies "currently provide non-standardized disclosures."

What three companies publish

Point offers a 30-year term, accepts credit scores of 500 and up, and charges "up to a 3.9% processing fee (subject to a $2,000 minimum)," taken out of the cash you receive along with appraisal, escrow and government fees. Its cap is described as "a maximum percentage, calculated annually," with no rate given.

Unlock's term is 10 years and its contracts run from $15,000 to $500,000. It charges "a fee equal to 4.9% of the lump sum you receive," plus third-party closing costs, and asks for a credit score of at least 500, a home valued at $175,000 or more and at least 30% equity. Its Annualized Cost Limit "sets a maximum return of 19.9% per year on Unlock's investment (or lower if required by state law)."

Hometap's public page says only that its investment gives you cash "in exchange for a share of your home's future value" and that you can use the money "for up to 10 years." Its pricing and FAQ pages couldn't be retrieved, so its fees and cap aren't listed here.

The lien, and why you can't pay it down

No payments doesn't mean no claim on the house. The CFPB says the company "secures their interest with a lien on the property, just as lenders do for traditional mortgages," which can limit your ability to refinance or take on new debt. Unlock records it as a performance deed of trust or performance mortgage and releases it at settlement.

You can usually settle in full before the term ends, but the CFPB found that homeowners "generally can't make partial payments." A sale is the usual trigger. Falling behind on the first mortgage, not paying property taxes or insurance, or the homeowner's death can trigger settlement too.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.