What Is Equity Investing and Has It Ever Been a Good Idea?
While owning your own home isn’t quite the “easy button” to wealth accumulation as it’s sometimes made out to be, it’s still a surefire way to increase your net worth in the long run. Aside from the emotional aspects of owning a home, a home is a significant asset—for most people, the biggest asset they’ve ever owned.
When you pay off your mortgage, you get more ownership—the percentage of the house that you wholly own. And that’s good news for most people, because your home is probably going up in value at the same time, despite the occasional market correction. For example, between 2009 and 2020, home values rose by just over 40% . And that’s good news, because most of us have almost no savings—more than a third of Americans can’t find $400 in emergency cash , and most people have less than $5,000 in savings . The use of equity is a vital economic buffer.
But getting to that justice can be a challenge. Typically, you raise capital by opening a home equity line of credit (HELOC) , getting a home equity loan, or arranging for a cash refinancing of your home. But if you have bad credit or don’t have enough cash to cover the closing costs and monthly payments these products require, you may be denied access to the value of your own property. The good news is that there may be another option: equity investment (HEI).
What is a university?
An equity investment is a deal in which an investor lends you a portion of your equity in exchange for a percentage of the future value of your home. They come in two main forms :
- Equity , in which the investor receives a minority interest in your home, the value of which rises as the value of the property rises.
- Shared appraisal , where the investor buys a percentage of the home’s future appraisal—the future appreciation of the property’s value.
In both cases, there is a loan term (usually 10-30 years). At the end of the term, you are required to repay both the amount of the original loan and the value added of the property. For example, let’s say you own a house that is currently worth $250,000 and you have built up a net worth of $100,000. An investor gives you a loan of $50,000 in exchange for 25% of the value of your home for a period of 10 years. In 10 years, your house is worth about $370,000, so its value has increased by about $120,000. You now owe your lender $80,000—the original $50,000 loan plus a quarter of the raise.
If you have a share-sharing agreement, you will receive a loan of $50,000 and the lender will receive 25% of the shares of the property. When you sell for $370,000 ten years later, depending on the specific language of your agreement, they can get back $92,500—a quarter of the value of your property—on the deal. Of course, if your home is undervalued—or depreciated —you owe the lender much, much less.
Universities will vary depending on the lender, so these numbers are just examples. If you think this might be a good option, be sure to study any agreement in detail to understand exactly how that particular loan will work because there are serious pros and cons to this type of loan.
Pros and cons of investing in equity
There are several good reasons why a university might be a good product for you:
- You are cash poor. HELOC and refinancing are generally the best options for using equity, but they involve paying loan costs and making monthly payments. If you don’t think you can afford the monthly fees, universities don’t require them, but many universities have upfront costs that you may have to pay .
- You have bad credit. If your credit score means you can’t qualify for most traditional home equity loan products, college is often your only option for raising capital from your home. Because they rely on the value of your property rather than your creditworthiness to make payments, your credit score is much less important.
- You don’t want to go into debt. Universities are not debt, they are investments. If you don’t want to increase your debt burden, these products will do the job.
However, there are some disadvantages to consider:
- These are credits for balloons. Higher education agreements give you cash without the burden of regular payments, but everything comes at the end of the term. In the example above, in 10 years you will owe your creditor $80,000, which must be paid in a lump sum. If you didn’t plan ahead, you may find yourself forced to sell your home even if you don’t want to.
- They may cost more. If your home becomes more valuable, you may end up paying a lot more for access to your capital than if you took out any kind of home equity loan. On the other hand, if the value of your home goes down, you may have to pay back less than the original cost of the loan.
- Your mortgagee may prohibit this. Some mortgages prohibit the sale of some of your equity, so you could get in trouble with the law if you try to set up an equity investment. Check your mortgage documents and possibly a lawyer before considering this option.
Over time, your house begins to represent a huge share of your wealth, but it is locked there in the form of a house that is difficult to lug to the store and spend. If you are unable to raise your capital for some reason, investing in equity might be a good option for you – just make sure you understand exactly what you are getting into.