How to Tap Home Equity Without Owing Interest
The catch: you may need to give up some money when you sell
Is it possible to pull out tens or hundreds of thousands of dollars from your home equity but not incur debt or be required to pay interest as you would with a reverse mortgage or home equity credit line?
Yes — provided you’re willing to cut investors into a share of the future growth in the market value of your home.
Two financial companies based in California (EquityKey and FirstREX) let you tap home equity now in exchange for giving them a portion of your home’s appreciation later, when you sell the place. There are no restrictions on how you use the funds when you get the cash.
Not For All Homeowners
But this sort of arrangement is not for everyone. It can take away large chunks of your future gains in home value, essentially limiting what you or your heirs will receive when you sell your home. And you might owe the company money if you unload the property within a few years of signing the agreement.
In short, shared-appreciation deals are probably best for owners with an immediate desire for cash who don’t plan to move anytime soon and believe local property values won’t soar in coming years.
Here’s how the general concept works:
Assuming you have at least 25 percent or more equity in your home and a good credit history, you may be eligible for a lump-sum cash payout — say $50,000 to $100,000 — depending on the value of your property. (EquityKey says it typically pays between 6 and 17 percent of a property’s appraised value.)
When you move out, if there’s been no appreciation or a severe depreciation in property values, you could owe the company little or nothing. If appreciation has been significant, you’ll need to share it.
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Under some circumstances, if you sell the house within five to 10 years of signing the agreement, you might need to come up with some money even if there was zero appreciation.
How Much Money You’ll Give Up
The size of the eventual split under both the EquityKey and FirstREX plans is up to you and is spelled out in the agreement you sign upfront. It might be for as little as 20 percent of future appreciation or as much as 100 percent, depending on the company and the terms you agree on.
Bear in mind that what you’ll split is only the amount your home’s value has grown since you signed up; any equity you had before that is not on the line.
For a simplified example, say your home appreciates $200,000 between the time you sign the sharing agreement this year and the sale date in 15 years and you chose the 50 percent option. In this case, you’d owe $100,000 in appreciation-sharing to the investor in the deal, straight out of the sale proceeds.
Where You Can Do This
Right now, EquityKey is offered in California, Florida, New York City and its New Jersey and Connecticut suburbs. FirstREX is available in California, Oregon, Washington and parts of Illinois, Connecticut and Massachusetts. Both firms plan to expand nationally but aren’t saying which states are next on their lists or when they’ll be added.
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Know What You’re Getting Into
The concept sounds straightforward and simple, right? But as you’ve perhaps already guessed, it’s not.
As with reverse mortgages, participating in an EquityKey or FirstREX agreement requires serious attention to the details and, ideally, some legal or financial planning guidance.
Since both companies are initially targeting homeowners with substantial equity — often in their 60s or older — understanding the ins and outs of their plans is essential before making a commitment.
How Appreciation Is Determined
Some quick background: Though neither Equity Key nor First REX technically provide loans, as investors they expect their money back plus a return on capital.
Looking at historical price trends (even factoring in the real estate bust in recent years) they see U.S. houses as a solid bet. As EquityKey puts it in its literature, “we believe that more often than not, our sharing of the long-term appreciation will more than cover our initial payment to you.”
In order to measure that long-term appreciation, both companies require upfront appraisals. If you strongly disagree with that appraisal, both firms allow follow-up valuations. Sabin Speiser, a spokesman for FirstREX, told me that “in the unusual circumstance where the homeowner and FirstREX do not agree, the issue will be determined through arbitration.”
FirstREX looks to the eventual sales price of the house to determine appreciation.
Equity Key, on the other hand, ties its end-point calculations to the most widely used home-price gauge for major metropolitan areas around the country, the Case-Shiller Index. So if your house was appraised in 2014 for $400,000 and there’s been a 25 percent increase in the local index when you sell, you’d split $100,000 with EquityKey according to the percentage you originally agreed upon. If it was 50 percent, EquityKey would get $50,000.
2 Tips Before Signing Up
Two important issues to keep in mind if you’re tempted by these arrangements:
1. Under certain circumstances, the investors may be entitled to substantial payments exceeding what you initially received, especially if you sell within five to 10 years. For example, in a disclosure document provided to applicants, EquityKey shows one scenario where a homeowner receiving $112,500 in cash at signing will owe a minimum of $180,000 if he or she sells four years later, even with zero appreciation in the index.
2. Though not mortgages, these agreements create publicly-recorded liens against your property. That means EquityKey and FirstREX have legal rights that are enforceable in court. Be sure to have a lawyer review all shared-equity documents before signing up.