Home Equity Agreements

Does anyone have one of these or have looked into them? These are not Home Equity Loans, which are mostly a second mortgage.
With a HEA, you get a lump sum of money, make no monthly payments, and owe a lump sum at the end of the agreement- either when you sell your house or after a set number of years.

Suppose you have a home worth $500,000 and have $100,000 equity in it. With an equity loan, you could take out about $65,000 but you have monthly payments until the loan is paid back.
With a HEA, you could borrow $50,000 and have no monthly payments. In ten years, you sell the house for $800,000 and would owe the original $50,000 and 10% equity of $80,000, so you pay $130,000 and walk away with a check for $670,000. You pay more in the end, but you had a $50,000 loan for ten years, so it all depends on how you used it.
There very well might be some pipebombs in these that I'm missing, but I think I looked at these very critically. I'm adverse to almost all forms of long-term debt, as well as most short-term debt. With these loans, you are partnering up with the banks
There aren't many banks offering these yet, and terms vary widely, as do fees and upfront cost. You can expect to lose about 5% of your loan to upfront fees. Because of reduced risk, banks accept lower credit scores on these "loans"

How does this differ from a "reverse mortgage"?

Quote: Dieter

How does this differ from a "reverse mortgage"?
link to original post

Reverse mortgages are only available to a certain class of people, and have set terms. You get monthly income or a lump sum and you know the payoff number. With a HEA, the more your house appreciates, the more it cost you.
Also, reverse mortgages now come with limits on what you can use the money for.
I can see these being useful in certain circumstances, but I can also see a lot of people pissing away futurre wealth for instant gradification.
The "Why struggle with a monthly car payment when I can sign now and pay later " mentality. Borrow $50,000 for a nice car that ends up costing $150,000 down the road.
The problem is that Americans have too much wealth tied up in the equity of their houses, and banks need access to it.

Quote: billryan

Quote: Dieter

How does this differ from a "reverse mortgage"?
link to original post

Reverse mortgages are only available to a certain class of people, and have set terms. You get monthly income or a lump sum and you know the payoff number. With a HEA, the more your house appreciates, the more it cost you.
Also, reverse mortgages now come with limits on what you can use the money for.
I can see these being useful in certain circumstances, but I can also see a lot of people pissing away futurre wealth for instant gradification.
The "Why struggle with a monthly car payment when I can sign now and pay later " mentality. Borrow $50,000 for a nice car that ends up costing $150,000 down the road.
The problem is that Americans have too much wealth tied up in the equity of their houses, and banks need access to it.
link to original post

Sounds like a bad deal. I owe MORE if my house appreciates? No thank you. And I am completely okay with banks having absolutely no access or right to my home equity or appreciation over time.

It sounds like it amounts to a Home Equity Loan with a balloon payment. It seems to be a little like a zero coupon bond without the sinking fund.

The kind of thing sophisticated borrowers could use but will be a depth charge for the lender if real estate prices do not keep up.

Quote: AZDuffman

It sounds like it amounts to a Home Equity Loan with a balloon payment. It seems to be a little like a zero-coupon bond without the sinking fund.

The kind of thing sophisticated borrowers could use but will be a depth charge for the lender if real estate prices do not keep up.
link to original post

They are designed so that bankers can tap into your equity. I doubt that much concern was given to the overall effect on individual homeowners.

I did one of these. It’s somewhat state dependent. There was only one company available in my state. I compared all of them and the terms are nearly all identical.

I guess the bad first. The terms are borderline usury. There is basically zero chance they can lose with it. First off they charge several thousand in closing fees/points that are just deducted from the loan amount. There are some legal closing fees which were reasonable. Legally it’s basically the equivalent of asecond mortgage. The way they basically can’t lose is that they lower the base amount that the equity share gets calculated on. Let’s say your house is worth $500k. You’re willing to sell 30% of future equity in for $100k. In 30 years or when you sell your home you have to pay back the $100k plus 30% of the equity increase(or they pay you the decrease if it goes down in value). But they don’t calculate it off of $500k. They set a significantly lower starting point. In this case probably 380. So they get 30% from 380 to the selling price. So your home would have to decline below that for them to lose, which is unlikely. There is a period for the first couple of years that you can pay it back and they basically charge the lesser amount of the equity or 24% interest. So if you pay it back quickly you’re basically paying credit card interest.

The good. It’s very straightforward. They didn’t play any games. On the site you can customize your options and you know exactly what you’re getting into. I got the feeling that they really didn’t care if I did it cause they got a line out the door of people waiting to go next. For a lot of people this can really fit their needs. For instance in a divorce if one person wants to keep a house but needs to pay the other their equity, this is a great option. A blood sucking one but it’s still available. Same with a retiree who wants cash and doesn’t care about the future equity of their home.

Thank you. Would you do it again? As these get more popular, the rates should get competitive.

Quote: billryan

Thank you. Would you do it again? As these get more popular, the rates should get competitive.
link to original post

I wouldn’t recommend it unless you really needed to. From a financial standpoint it’s a terrible deal. Again it was well laid out. But the fact that they significantly decrease the equity starting price is really bad. I wouldn’t expect it to become more competitive. With the rise in home values there are plenty of people willing to give up their equity for some immediate cash. A second mortgage is a much better option if you can qualify and afford it.

I’ll be playing mine back here in the next month or so.