How to Use Home Equity for Cash Without Debt
Homeowners who have at least 20 to 25 percent equity in their home can get cash out now without taking out an equity loan or a reverse mortgage. A relatively new product, called a "shared equity" product, offers to give a portion of the homeowner's equity to him in cash now for a future split of the home's equity growth from the date of the agreement forward. It's an interest-free transaction for the homeowner, and no payments are due until the house is sold in the future, as long as it's not sold within 5 years of the date of the agreement. Here's how to evaluate a "shared equity" arrangement.
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Instructions
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Calculate the amount available in equity. The maximum is usually about 15% of equity. For example, on a home valued at $500,000, the maximum cash available is $75,000. If you need the money now and don't have the income to service a monthly loan payment, it's possible a "shared equity" agreement would be a reasonable choice.
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Understand the structure of this type of agreement. You get cash now, which you agree to repay upon the sale of your house (at least 5 years into the future). In addition, the company gets a high percentage of your future equity. For example, in the scenario above, the homeowner pays back the $75,000 plus 50% of any appreciation in value above $500,000. If the house has no appreciation, the homeowner pays only the $75,000. If the house decreases in value, the company shares the loss and the homeowner pays back only a percentage of the $75,000.
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Consider this deal only if you must have a substantial amount of money now and you cannot qualify for or make payments on an equity line of credit or a reverse mortgage. You are betting against your home's future value when you enter into this agreement.
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Contact companies that offer this product (see Resources below). Read the fine print of the agreement. One caveat is that these companies reserve the right to take control of the property if you miss your regular mortgage, property tax or homeowner's insurance payments. There may also be a clause requiring you to keep the property in good condition throughout the term of the agreement, and the company decides what "good condition" means.
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Tips & Warnings
Make sure you have an independent appraiser establish the baseline value your home before signing an agreement. Some people who have explored this concept report that their homes have been "low balled" on the appraisal, when the company chooses the appraiser, establishing values well below the market. This gives the company an automatic profit if a later appraisal comes in higher than your baseline appraisal, even if the market has not gone up significantly.
