The Risks and Rewards of Home Equity Investments

Imagine being able to tap into the equity of your home without any payments or interest.

It sounds too good to be true, right?

In today’s financial marketplace, there are options for just about everything, and a growing new form of financing called home equity investments or home equity contracts does just that.

With these contracts, a company provides the homeowner 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.

Much like anything in the financial realm, there are pluses and minuses to HEIs, but as estate planners, we’re reluctant to see our clients commit significant sums of money that will need to be paid right when retirement starts or years after.

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.

How Does This Work?

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 to pay for a new pool. After all, like Clark Griswald found out in Christmas Vacation, the days of a company bonus paying for a pool are over.

Refinancing the home can be troublesome, especially if the homeowner’s credit is not stellar. Interest rates are high, and the homeowner really can’t afford an increase in their mortgage. Likewise, a home equity line of credit includes a new monthly payment, and interest rates are even higher, putting those outside the limits of the homeowner.

Paying with the credit from the pool company? Hopefully, you noticed the extremely high interest rates before signing up.

So, a home equity investment might work for that homeowner.

There are a few companies – backed by venture capital – that offer these types of payments. Those companies pay the homeowner a percentage of your current value, say 10 percent of your home. 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.

Keep in mind, it is virtually impossible to know what that number may be until it’s due!

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