Equity sharing allows homebuyers with low or no down payment to buy a home. Investors also get tax benefits and a low-risk investment. These qualities make equity sharing an attractive alternative to other home buying options like taking out a second mortgage. Here’s how it works. A financial advisor could help you create a financial plan for your home buying needs and goals.
What Is Equity Sharing?
Equity sharing allows those who have built equity in their homes to access some of its cash value, which they can use for a down payment or for other purposes. These agreements are not loans, meaning they have no monthly payments or interest.
In return, homeowners share in the appreciation of some of their home’s equity with equity sharing company. Equity sharing is useful if you have built up a lot of equity in your home but can’t afford the down payment for the new home you want to buy.
There are other options, such as a home equity line of credit (HELOC), but the allure of equity sharing is they aren’t loans. The thought of taking out a second mortgage on your existing home only to take out a mortgage on a new home may not be very appealing.
However, the fact that you must repay the entire balance at the end of the equity share could be problematic for some homeowners.
How Equity Sharing Works
Typically, the home-sharing company will work with a third-party appraiser that will inspect your home and assess its value. Note that you typically pay for the appraisal, not the home-sharing company. You also pay for transaction fees, title and escrow, title insurance, state taxes, and other fees, which can total thousands of dollars.
Based on the result of the appraisal, the home-sharing company will offer you a portion of the equity you have built – typically between 5% to 20% of that value. Some home equity companies also cap the amount they will offer you at $500,000.
For example, suppose you have $200,000 of equity in your home, and you are offered 15% of that equity, or $30,000.
At the end of the term (usually 10 or 30 years), you must repay the lump sum plus a portion of the home’s appreciation. If you sell the home before the end of the term, the same rule applies.
Going back to the earlier example, let’s assume the term lasts 10 years. If the appraised value of your home is $350,000 and it appreciates 25% by the end of the 10-year term, you would owe an additional $13,125. We find this by multiplying the appreciation by the 15% offer mentioned earlier:
$350,000 * 0.25 = $87,500
$87,500 * 0.15 = $13,125
With this example, you would owe a total of $43,125 at the end of the 10-year term. That could be a tough pill to swallow for some homeowners.
How to Share Your Home’s Equity
There are several private companies that offer equity sharing. Some examples are Unison, EquiFi, Hometap, Point, and Unlock. Most of them only offer equity sharing in select states, so check with each to see if they are available where you live.
Pros and Cons of Equity Sharing
Equity sharing is an interesting alternative to other ways to access your home’s equity, such as HELOCs.
Pros
- Allows you to access your home’s equity without a loan
- No monthly payments or interest
- Money can be used for any purpose
- Home depreciation decreases the amount you owe
Cons
- Large payments are often required at the end of the term
- May require you to cover a lot of fees, such as appraisal costs
- Home appreciation increases the amount you owe
- May not be available in all states
Bottom Line
Equity sharing allows you to share in the appreciation (or depreciation) of your home. It serves as an alternative to other methods of accessing home equity, such as HELOCs. However, equity sharing is not a loan, meaning there are no monthly payments or interest.
This can make equity sharing useful, especially if you have built up a lot of equity in your home and want to buy a new home, but you don’t have a lot of cash. If the thought of taking out a second mortgage makes your stomach turn, equity sharing might be worth considering.
But they can also be very costly. You might have to pay for appraisal fees, and you might owe a large lump-sum payment at the end of the term. Thus, you should carefully weigh all of your options before considering equity sharing.
Tips for Buying a Home
- A financial advisor can guide you through major financial decisions, like the purchase of a home. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you are using equity sharing to help you buy a new home, it’s important to know how much home you can afford. You also must consider the mortgage term, fixed vs. variable rates, and the monthly payment. If you want to find out how much house you can afford, use SmartAsset’s calculator.
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