What to Know About a Home Equity Investment

Homeownership By Noah - February 1, 2022

Home equity investments are an excellent yet little-known option for homeowners to cash out equity without taking on additional loans or monthly payments.

Also known as shared equity investments, this investment strategy allows homeowners to tap into their equity by allowing interested parties to pay for a stake in the future appreciation of your property. Unlike shared appreciation mortgages, home equity investments take place after the purchase of your home and typically carry no interest. 

Instead, investors pay a lump sum to homeowners based on the current equity accrued in the property. This sum represents a stake in the future value of your property, also known as an appreciated value, which investors will recoup at the end of the agreed-upon term (generally ranging from 10-30 years) or upon sale of the property. 

Home or shared equity investments are also attractive options for homeowners that struggle to qualify or secure traditional loans or mortgages. Home equity sharing companies and investment groups that specialize in shared equity investments generally have more forgiving underwriting standards, allowing more flexibility in their partnerships. This flexibility means homeowners that suffer from poor credit can still tap into their accrued equity and cash out thousands of dollars without going through conventional lenders.

What is a Shared Equity Investment?

Shared equity investments have been around for decades, and over that time a variety of terms have been popularized to describe them. Also known as Home Sharing Investments and Home Equity Investments, these terms all describe a real estate investment strategy that provides homeowners with access to their home equity, in return for a stake in the future value of the property. 

Under ideal circumstances, shared equity investments are profitable for both investors and homeowners. The basis of shared equity investments hinges on the appreciation of partner properties, creating a win-win scenario for both parties that is rare in equity and mortgage arrangements. If your property increases in value during the term of the agreement, both parties will profit from the value that accrued during the life of your contract. 

Is a Home Equity Investment the Same as a Shared Appreciation Agreement?

Despite common misconceptions, shared appreciation agreements are functionally identical to home equity investments. Often confused with shared appreciation mortgages, which are an alternative style of loan that entails interest and monthly payments, shared appreciation agreements retain all of the benefits of home equity investments. 

For an apples-to-apples comparison, home equity investments should be examined under the same lens used for cash-out refinances, reverse mortgages, and home equity lines of credit. 

Home Equity Investment vs. Cash-Out Refinance

When the value of a property exceeds the remaining mortgage, homeowners begin to build equity. Traditional cash-out refinance and home equity investments allow homeowners to benefit from this advantageous position by providing access to a portion or all of the unrealized gains in equity. 

However, refinancing your home means replacing your current mortgage with another mortgage, which would cover any remaining balance from your original purchase as well as the amount of equity “cashed-out” as part of the agreement. This means that while refinancing remains a popular strategy for benefitting from equity, it also carries considerable risk. Homeowners may be trading in a nearly paid-off mortgage for a loan that could turn upside down due to a variety of unexpected circumstances. 

Home equity investments require neither monthly payments nor an annual interest rate, edging out cash-out refinancing for many homeowners who are seeking cash without additional monthly payments.

Home Equity Investments vs. Reverse Mortgages

Reverse mortgages are an all-around fantastic option for home equity access. Reverse mortgages provide an opportunity for homeowners to take advantage of their home’s equity without moving or taking on new monthly payments while retaining the deed to their property entirely. 

There’s just one major catch: Only homeowners aged 62 or older are eligible for reverse mortgages! This single qualifier dramatically impacts the amount of equity-seeking homeowners eligible to take advantage of this loan. Additional drawbacks of reverse mortgages include less equity for you and your heirs, varying and non-tax-deductible interest rates, and snowballing costs due to interest accumulation over the life of the reverse mortgage.   

Home Equity Investments vs. Home Equity Lines of Credit (HELOC)

Home equity lines of credit are additional mortgages or loans that serve more like traditional credit cards than conventional home equity access programs. Homeowners securing a home equity line of credit will be able to “draw” from their home equity up to a maximum amount, similar to conventional lines of credit. This draw period lasts for a period of time, generally 10 years, after which homeowners enter into the repayment phase of their home equity line of credit agreement.

Unlike shared appreciation and home equity agreements, homeowners are subject to steadily accruing interest during the draw period. This interest, plus the equity borrowed will be obligated to be repaid at (most often) a varying interest rate over the next 20-30 years, making HELOCs a potentially risky venture for many homeowners.

What Are the Benefits of a Shared Equity Investment? 

Home equity investments align homeowners' and lenders' interests, allowing for agreements that are more mutually beneficial for both parties compared to equity access options. This alignment exists because both parties benefit from the appreciation of the homeowner's property, and share the risk of a market downturn or similar event that could result in decreased property values. 

For example, consider a homeowner that enters into a shared equity agreement with a property valued at $500,000 with equity totalling $150,000. A home equity sharing company may offer the homeowner a lump sum of $75,000 for a 25% stake in the appreciation of the property over the next decade. 

During that time, the homeowner would make no additional monthly payments towards the $75k lump sum, and no interest would accrue. Instead, at the end of the 10-year term, the investor would become entitled to their initial investment ($75,000) and a sum equivalent to their stake in the property’s appreciation. 

If the property increased in value from $500,000 to a cool $1,000,000 (which is feasible when you consider the median sales price of homes sold in America skyrocketed from roughly $220,000 in 2011 to over $400,000 by 2021) the investor would be entitled to the agreed-upon share of the value, 25% or $125,000. And while this sum represents a tidy profit for investors, the shared equity agreement leaves the homeowner with a staggering $300,000 in appreciated value, making it easy to see why shared equity investment is an attractive option for accessing home equity, especially in high-cost markets found in major cities and along the coasts. 

Shared equity investments not only offer an opportunity to break into these competitive markets but also to benefit over the long term as property values continue to rise in popular areas. A prospective buyer in an expensive market can avoid costly PMI and crippling interest rates by supplementing their down payment with a shared equity investment. Then, after enjoying 10 years of steady appreciation and equity accrual, the buyer can repay their equity investment partner in full, while retaining ownership of a rapidly appreciating property in an increasingly hot market.

Shared equity investments also have a leg up on the competition when it comes to potential downsides. Unlike refinances, HELOCs, and reverse mortgages, investors also share risk with homeowners during their relationship. Homeowners who experience property devaluation during a shared equity agreement don’t have to worry about their investment partners seeking to claim partial ownership of their home or pursue action to recoup the invested funds.

To circle back to our example above, if the property in question decreased in value from $500,000 to $420,000 over ten years, the investing partner would not be entitled to their lost investment. In this case, the initial sum of $75,000 would be subtracted from the $80,000 loss in value, creating an overall loss of $5,000 for investors. Investors would have no right to seek compensation or recompense from the homeowner in this situation, as risk is an inherent and anticipated possibility in any investment.

When Do I Need to Repay My Home Equity Investment? 

Home equity investment repayment terms vary, but the most common term is 10 years. There are additional events that could trigger repayment, including a sale or foreclosure on the property. 

There can be additional costs at the conclusion of your shared home equity appreciation agreement. Common costs and fees homeowners should be aware of when considering home equity investments include:

  • Service fees
  • Appraisal fees
  • Escrow costs
  • Title transfer fees
  • Processing fees
  • And in some cases, origination fees

Despite these costs, home equity investments remain attractive to savvy homeowners looking for a convenient and low-cost method for tapping into their equity. Offering unmatched ease-of-access to equity and zero-interest or monthly payments owed to investors, home equity investments are gaining increasing market share against traditional strategies for accessing equity.

How Do I Tap Into My Home Equity? 

If you’re looking to tap into your equity, a home equity investment deserves strong consideration. By providing near-instant access to equity, home equity investments offer an extremely convenient path towards securing funds without increasing monthly obligations. And since your property will (likely) appreciate significantly over the term of your agreement, finally getting around to that bathroom remodel or going all-in on a kitchen overhaul could lead to a tidy profit when you decide to sell your property.

How Do I Get Started?

The best home equity sharing companies, like Noah, have revolutionized the home equity agreement process with easy-to-use platforms that streamline your ability to tap into your home equity. So find out today if you are eligible for an investment of up to $500,000. Tap the link and see if you qualify.