Could a Home Equity Investment Pay Off?

A new kind of financing tool is growing in popularity, allowing homeowners to tap into the equity of their home without monthly payments or interest rates.

Instead, the home equity investment or home equity contract provides a homeowner with a payout that is paid back in 10 or 30 years, or if the home is sold.

There are no payments before then. You aren’t charged interest. Instead, you are required to pay an amount dependent on the appreciation or depreciation of the value of your house.

In a previous article, we discussed why homeowners should look at these with caution, as they could negatively impact retirement or more than they are due.

However, these new tools could be helpful for some people, particularly to prevent a foreclosure or the need for bankruptcy protection by providing cash to help reduce debts and get a homeowner back on their feet.

The attorneys at The Orlando Law Group can help look at all options of a home equity investment and help advise you on your short-term and long-term obligations, along with how it fits with your current estate planning.

What is a home equity contract?

To recap the previous article, the nuts and bolts of a home equity investment are relatively simple.

Let’s say the current value of a home is now $500,000, and the homeowner decides to tap into the equity of the home.

There are a few companies, backed by venture capital, that offer to pay the homeowner a percentage of the home’s current value, say 10 percent. On the $500,000 home, they would give the homeowner $50,000 for that new pool.

When the homeowner goes to sell their home, or when the term of the investment ends, the homeowner must pay back 20 percent of the value of the home at that time. What that number may be is not known until it is time to pay back the money.

The basis for the payback is entirely dependent on what the real estate market does in that specific location. If the value of your home increases, your payment increases. If the value of your home goes down, your payment will decrease.

In Florida, it is very rare to see home values decrease for an extended period. The average home value in the Orlando area in 2020 was just $269,000, and today, it is nearly $400,000.

Just an average three percent increase over 30 years could result in a payment of more than $350,000 in exchange for $50,000.

Compare that to a home equity line of credit at today’s interest rates. While a homeowner could have a $411 monthly payment on $50,000, the total paid over 30 years would only amount to around $150,000.

A home equity investment payback can require a substantial amount of money. At the end of the contract, you may be forced to sell your home if you do not have the amount needed to pay back the agreement.

Are there places where a home equity investment makes sense?

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