Perhaps you haven’t heard of Shared Equity Investments until recently and are eager to learn all about it. We get it. You’re looking to get some cash for whatever purpose and aren’t sure whether you should be getting a home equity loan, a HELOC, a reverse mortgage, or go into a shared equity agreement.
Shared equity agreements aren’t nearly as well known out there, and we’re here to help you figure out which one is right for you. In this post, we’ll cover the necessary points to know, as well as provide an overview of various companies that offer shared equity agreements and highlight the differences among them, both the good and the bad.
What are shared equity investments?
First off, shared equity investments can often be referred to in various ways. They include:
- Shared equity investments
- Shared equity agreements
- Home equity investments (HEI)
- Home equity sharing
- And sometimes, just plain ol’ Shared Equity
You’ll notice that the name itself offers a lot of insight into what exactly it is. Let’s break it down.
- Home – this involves a home or property of some sort, and it’s up to the company as to what types of properties they accept.
- Shared – you’ll be sharing ownership of the property after all is agreed upon and signed.
- Equity – the equity of the home is what’s being shared by the two or more parties involved in the agreement.
- Investment – the company that is partnering with you, the homeowner, is making an investment in your home. They aren’t simply doing this out of the kindness of their hearts. The numbers matter to them and need to make sense.
- Agreement – all this involves a legal document that both parties must agree to and ultimately sign.
There you have it. Let’s get more into more details.
Details and expectations in a shared equity agreement
In a shared equity agreement, terms are generally 10 to 30 years in length, and it varies by company. During that time, there are no monthly payments to be made, whether it be principal or interest payments. It’s usually at the time of closing a sale of the property that you’re required to pay the equity portion back to your partnering company or companies.
Each company does charge an origination fee, and they tend to hover around the 3% mark.
As far getting your cash, you’ll be able to get it all upfront. The amount varies, but there are some home equity investors offering as high as $600,000 in equity access. You’re free to use the cash for whatever you want, whether it be to pay off debt, medical bills, buy a new boat, etc. Fullerton, California
Even though it’s not a loan, you still have to pay back the amount owed to the equity investor. They’ve given you a lump sum in exchange for equity, but eventually, they’ll want to cash out on that equity. There are a few ways to pay them their share:
- You can sell the home at the end of the agreed upon term, and when you pocket the proceeds, you give the equity investor company the amount they gave you plus their percentage stake in the appreciation of the property. If the property depreciates, that will get subtracted from their share accordingly.
- You can refinance at the end of the agreed upon term for the amount they gave you plus (or minus) their percentage stake in the appreciation (or depreciation) of the property.
- If you are able to pay them back plus their stake in appreciation without selling or refinancing at the end of the term, you’re allowed to do that too.
- Should you wish to repay before the agreed upon term is up, you can do so by selling the house, getting a cash-out refi from a lender, or coming up with the cash in some other way. If the home appreciates during that time, you pay them back the amount they gave you plus their percentage stake in the appreciation. Keep in mind that if you buy out your investor’s stake at any time before the term is up, the equity investor most likely won’t share in any losses should your home depreciate during that time.
For every home equity investment company, there are slight variations as to what they allow and don’t allow, and it’ll all be outlined in the agreement. Be sure you understand the terms of the agreement before signing on to anything.
How is a home equity shared agreement different from a home equity loan or HELOC?
A home equity shared agreement is more similar to a home equity loan than a HELOC in the sense that the money being paid out to you is in a lump sum in both equity shared agreements and home equity loans as opposed to leaving an open line of credit as with a HELOC.
Furthermore, home equity shared agreements often have more in fees than the other two traditional routes. A HEL or HELOC makes the lender money via interest payments on the amount borrowed or drawn, respectively. A home equity shared agreement, on the other hand, charges an origination fee usually around 3% of the home value. On top of that, when an appraisal is done, the value that results is usually discounted 2.5-20%, depending on which company you decide to go with.
Lastly, home equity shared agreements allow you to borrow an amount that is usually less than what you could get with a HEL or HELOC for any given property.