Understanding the Benefits and Risks of Home Equity Release Products
When you’re a homeowner, you may find yourself
wondering how much home equity you’ve built up since starting mortgage
repayment. Why should you care about this? Well, property value, or home
equity, is a key factor in overall net worth. For many homeowners, their greatest asset will be the
home equity to their name.
Aside from wealth building, home equity is valuable for another reason. It’s a valuable financing tool that you can tap into it when needed. Oftentimes, banks and lenders offer home equity loans or home equity lines of credit (HELOC) with advantageous interest rates that are readily accessible so long as you have built enough equity.
In addition to these entrenched
products, there is a third home equity option making headway into the industry. With
the advent of the home equity release product (or home equity leaseback), homeowners
have another way to take advantage of their home’s value. But, what is a home
equity release product? Read on to learn a bit more about this new idea – and
whether it’s right for you.
What Exactly is a
Home Equity Release Product?
In short, a home equity release, or a home equity leaseback, starts with completely selling your home equity to a company; the buying company offers cash for your home’s value. After the sale, you have the option to enter a lease agreement where you rent out your home for a set period of time. Moving forward, you have the option to buy back your home equity at a later date.
Home equity leaseback products are different than traditional home equity loans and HELOCs. Here’s a quick rundown of these differences:
- HELOC: With a HELOC, you get approved for a credit limit derived by your equity. You withdraw the money you need during a draw period. When the draw period ends, you pay it all back plus interest in monthly installments.
- Home Equity Loans: In this case, you simply borrow a loan secured by your home equity. There is no HELOC draw period, but you immediately must start making monthly installment payments.
- Leaseback programs: These programs involve selling your home outright and cashing in on the equity. Then you can stay in your home as a renter with the option of repurchasing the home. It isn’t a loan, but you would need to buy back your home if staying.
Leaseback programs are becoming increasingly common in the U.S. and are offered by companies like Easy Knock and Figure (The “Sell and Stay” product from Easy Knock and the Figure Home Leaseback are two examples) Keep in mind that these companies, such as Figure, still offer traditional home equity loans and lines of credit, but the home equity-leasing option is becoming more prominent.
So, to recap, a home equity leaseback involves selling your equity off, leasing your home and staying there, then either buying back the home or leaving with your cash. It’s an interesting idea. Yet, it begs the question: why would you want to just sell your home, lease it, and potentially leave?
Gauging the Advantages and Risks
There are pros and cons of choosing this kind of product. Before you can make an informed decision, you need to fully understand the advantages and the risks. Your home equity is an extremely valuable asset that should be used with utmost caution.
Advantages
If you need cash fairly fast, this is a good way to get it. With Easy Knock, for instance, you can get your cash in 13 to 21 days, depending upon which plan you go with. Those with high-value homes can receive a large sum fairly soon.
In addition to quick access to cash, you don’t have to put your home on the market or move out after selling. If you decide you want to buy it back at some point, you have the option to do so. Lease terms are open to negotiation as well.
Eligibility is mostly based on equity ownership. Since it isn’t a loan, you don’t need to meet the same strict credit requirements upfront. Keep in mind that credit is still considered to some extent; for instance, Easy Knock prefers working with consumers without high debt-to-income ratios.
Furthermore, you do not pay interest to the leaseback company because it is not a loan; however, you may be paying rent instead if you decide to stay in your home. Additionally, home equity loan borrowers are forced to make both mortgage and home equity loan payments, but this won’t be the case with home equity release.
Risks
There is a fee to pay for home equity leaseback products, and the fee varies depending on the buying company. It is usually taken as a percentage of the home value which could be a substantial sum, but some companies do not charge fees. Keep in mind that both HELOCS and home equity loans involve closing costs as well.
On top of the fee, those who reside in their homes will pay rent. Some companies charge rent as a percentage of home value, while others will determine a fair market value for rent in the area. Either way, paying rent to live in “your” home may not suit certain homeowners who may think twice at selling their status as a homeowner.
Finally, buying the
home back may be difficult to swing financially. If you used the cash for other
purposes, then it could be unfeasible to come up with enough cash to make the
purchase. If you have a special attachment to your home, this could be a
serious issue.
What Type of Homeowner Does Home Equity Release Work For?
Generally speaking, home equity release is great for someone who needs a large amount of cash quickly but isn’t quite ready to leave the house. Additionally, it can be a good fit for homeowners with immediate plans to leave but haven’t put their homes on the market yet.
If you are nearing your retirement years and plan on moving, then you could tap into your equity earlier if needed. It could be a useful tool for someone who wants to pay off debt, such as high-interest credit card debt if they also intend on moving soon anyway.
It’s not a good pick for someone who plans to stay in their home for years to come. If you have no intention of moving, you may be better off seeking out alternative financing solutions. Homeowners who have young kids in school may want to think twice (or any homeowner who’s attached to his or her abode).
A home equity leaseback product might make you scratch your head in confusion. Why sell your home and stay? Yet, it can be a powerful way to get cash and especially suits homeowners planning on moving away. Even if you don’t move, you still have the option of residing in your home until you figure out new plans moving forward.
Article by Andrew Rombach, https://lendedu.com/
Andrew is a Content Associate for LendEDU – a website that helps consumers, homeowners, real estate investors, and others with their finances. When he’s not working, you can find Andrew hiking, hanging with his cat Colby.
Featured Photo Courtesy of Daily Express