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Imagine being able to borrow equity from your home and not have the responsibility of paying it back through monthly payments. Does this sound too good to be true? I will let you determine that. The loan I am referring to is a shared equity mortgage. There are different types of shared equity loans. The following provides information on the private or investor shared equity program.
The premise of this mortgage is an agreement in which the investor and the borrower share ownership of the property. The investor does not live there, however, they may want a say in the remodeling of the home. When the property sells or is refinanced, the investor collects the principal amount borrowed plus the agreed upon amount of equity. The percentage of equity requested at the time of closing typically ranges between 25%-70%. I have seen percentages as high as 75%. That is a substantial portion of the equity payout.
The shared equity loan comes with definite benefits. The borrower makes no payments on the loan and there are very few limitations on what the funds can be used for. In my research, I found that many of the investors suggest using the money for things like starting a business, paying for education and even going on vacation. This product is not credit score reliant. The reason for this is because it is not viewed as a loan by the investor, it is a partnership in the ownership of the home.
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The investor is taking the risk that your home will increase in value. Most areas in the United States have between 3%-4% annual appreciation. Unfortunately, that is not always the case. Due to unforeseen circumstances, an area may have depreciation in home value. The shared equity product typically has a safety net for the borrower if the home sells for less than it was valued at during initial appraisal. In this case, they are essentially sharing in the loss.
Let’s take a look at some of the cons of this product. Like a loan, there are fees associated with the product including appraisal fees and origination fees. As mentioned before, you may need the investor’s permission to do home improvements. If you plan to modify the home, which could potentially lower the value of the home, the investor may not agree to it. If you disagree with the appraisal, then there will be no deal.
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The biggest draw back is the overall expense of this loan. For example, a borrower needs $35,000. The home appraised at $200,000 at the origination of the program then appreciates by $50,000 over the next 7 years. If the borrower sells the home for the $250,000, the investor can typically take 70% of that $50,000 which is $35,000. In addition to the $35,000 in equity, the homeowner must pay back the principal borrowed, $35,000. In total the homeowner paid $70,000 back to the investor. A traditional home equity loan would have been much less expensive.
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You can refinance and buy the investor out, but in most cases you must stay in the home for a minimum period of 3 years, and most programs require that the loan be paid back at 30 years. There are similar programs used for down payment assistance. Please make sure that you read the fine print before entering into any contract, and take the time to look at the whole picture and not the immediate need. Navicore Solutions has certified housing and credit counselors who are available to discuss options if you are struggling with your finances and wish to use your home equity as a solution at 1-800-992-4557.
Kim Cole is the Community Engagement Manager for Navicore Solutions. Kim provides financial education workshops and seminars to communities. Readers can submit general questions relating to personal finance, credit scoring, debt management, student loans, home finance or bankruptcy which may be highlighted in the next month’s edition. All identifying information will be kept anonymous.
Please send your questions via email to DearKim@navicoresolutions.org