HEI: A Smarter Alternative to Mortgage Refinance?
Thinking about a cash-out refi? There may be a smarter way. A Home Equity Investment agreement (HEI) gives you access to your home’s value — with no new loan, no monthly payments, and fewer hoops to jump through. See what you qualify for in minutes.
Home Equity Investment vs Mortgage Refinance
| Feature | Home Equity Investment | Mortgage Refinance |
|---|---|---|
No Monthly Payments | ||
No Need to Refinance | ||
Flexible Credit Requirement (500+) | ||
No Debt-to-Income Requirement | ||
No Impact on Current Mortgage | No change to existing mortgage | Replaces current mortgage (rate might go up) |
A home equity investment (HEI) agreement is not regulated as a loan in all states. Because a lien will be placed on your home, you could be required to sell your home to satisfy repayment obligations. Always review the full terms and consult a financial advisor.
When homeowners need access to the equity in their property, cash-out mortgage refinancing is often one of the first options considered. However, shared equity alternatives offer a more flexible and potentially less risky way to access home equity without taking on additional debt or changing the structure of your existing mortgage.
In the continuation of this article, we will explore how shared equity programs work, key factors to consider, and whether these alternatives may be a better choice for you.
Key factors to consider
Before deciding between a shared equity alternative and a cash-out mortgage refinance, it’s important to evaluate the following factors:
- Debt vs. equity share: A cash-out refinance increases your mortgage balance, while shared equity options involve giving up a portion of your home’s future appreciation.
- Costs: Refinance loans may come with closing costs and interest, whereas shared equity programs have different fee structures.
- Monthly payments: Cash-out refinances require monthly payments on the increased loan amount, while shared equity agreements don’t involve monthly payments.
- Long-term impact: Consider how each option will affect your home’s value, equity, and ownership over time.
Tips to compare
When evaluating shared equity alternatives and cash-out mortgage refinances, ask yourself the following:
- How much equity can I access?
- What are the associated fees and costs?
- Will I owe interest or share future home appreciation?
- How will monthly payments (or lack thereof) affect my cash flow?
- What happens if my home increases or decreases in value?
What is shared equity?
Shared equity programs allow homeowners to access cash by partnering with an investor or company in exchange for a share of the home’s future appreciation. Unlike traditional loans, shared equity programs don’t require monthly payments or interest. Instead, you agree to give up a percentage of your home’s future value when it’s sold. This means that the amount you owe will depend on how much your home appreciates or depreciates during the time of the agreement.
What is cash-out mortgage refinance?
A cash-out mortgage refinance is a loan that allows you to borrow against the equity you’ve built in your home by refinancing your existing mortgage. You replace your current loan with a new mortgage, typically for a larger amount than what you currently owe. The difference between your new loan and your original balance is given to you as cash. In exchange, you take on additional debt and must make monthly payments on the higher loan amount.
How do both work?
- Shared equity: You receive cash upfront by agreeing to share a percentage of your home’s future appreciation with an investor. No monthly payments or interest are required, and the agreement is settled when you sell your home.
- Cash-out refinance: You refinance your existing mortgage, taking out a larger loan to access your home’s equity. You receive the difference in cash but are required to make monthly payments on the new, larger mortgage.
Key differences between a shared equity and a cash-out mortgage refinance
- Ownership: With shared equity, you maintain full ownership of your home but share future appreciation. In contrast, a cash-out refinance doesn’t affect ownership but increases your mortgage balance.
- Repayment: Cash-out refinances require monthly payments, while shared equity agreements do not involve immediate repayment.
- Cost structure: Cash-out refinances may involve closing costs, interest, and fees, while shared equity agreements typically involve sharing future home value without traditional loan fees.
- Impact on equity: Cash-out refinances increase your mortgage debt, reducing your immediate equity, whereas shared equity programs reduce your future equity by sharing appreciation.
Is a shared equity alternative right for you?
A shared equity alternative may be a good fit if:
- You want to access cash from your home without taking on new debt or monthly payments.
- You’re comfortable sharing future appreciation of your home with an investor.
- You need flexibility and prefer avoiding the risk of default or foreclosure associated with traditional loans.
- Your home’s value is expected to appreciate, and you are okay with the idea of giving up a portion of that value.
However, if you prefer to retain all future equity or have access to more traditional financing options, a cash-out refinance may still be a better option.
How long does it take to get a shared equity agreement?
The process for obtaining a shared equity agreement typically takes 3 to 6 weeks, similar to a mortgage refinance. The process involves submitting an application, getting your home appraised, and reviewing the terms of the agreement. Once approved, you receive your funds and enter into a long-term contract with the investor.
How to apply for a shared equity agreement
Applying for a shared equity agreement involves the following steps:
- Research potential investors: Compare different companies that offer shared equity programs to understand their terms, fees, and equity share requirements.
- Submit an application: Provide information about your home’s value, your financial situation, and your goals for accessing equity.
- Home appraisal: The investor will arrange for an appraisal to determine your home’s market value.
- Review the offer: Based on the appraisal, the investor will make an offer outlining how much you can receive and the percentage of future equity they will require.
- Finalize the agreement: Once you accept the offer, you’ll sign the contract and receive your cash.
How much money can you receive?
The amount of money you can access through a shared equity agreement typically ranges between 10% and 20% of your home’s current market value. This amount depends on the investor’s terms and your home’s projected future appreciation. The investor will calculate the offer based on your home’s current value and their expected share of its future value.
How do we calculate the potential costs?
The potential costs of a shared equity agreement are determined by the percentage of your home’s future value that the investor will receive. For example, if your home appreciates significantly, you may owe more in the future than you initially received. It’s important to ask for a detailed breakdown of the agreement, including any fees and the share of appreciation, before finalizing the contract.
Alternatives
In addition to shared equity and cash-out mortgage refinances, other alternatives for accessing home equity include:
- Home equity line of credit (HELOC): A HELOC allows you to access a revolving line of credit based on your home’s value, offering flexibility to withdraw funds as needed.
- Home equity loan: A traditional home equity loan offers a lump sum with a fixed interest rate and regular monthly payments.
- Reverse mortgage: Homeowners aged 62 or older can access their home equity through a reverse mortgage, repaid when the home is sold or the homeowner passes away.
- Downsizing: Selling your home and moving to a less expensive property may free up equity without the need for loans or shared equity agreements.
Bottom line
Shared equity alternatives to a cash-out mortgage refinance offer a unique way to access home equity without increasing debt or requiring monthly payments. While both options allow you to tap into the value of your home, they function differently in terms of ownership, repayment, and long-term impact on equity.
Evaluating your financial needs, comfort with future equity sharing, and the potential for home value appreciation can help you determine which option is best suited for your situation.
Frequently Asked Questions (FAQs)
What happens if my home value decreases with a shared equity agreement?
If your home decreases in value, the investor typically shares in the loss. Since shared equity agreements are based on a percentage of your home’s future value, if the home sells for less than expected, the investor will receive less than originally anticipated. This helps protect you from owing more than your home is worth in the event of a market downturn.
Can I refinance my mortgage if I already have a shared equity agreement?
Yes, in many cases, you can still refinance your mortgage even if you have a shared equity agreement in place. However, refinancing may require you to settle the shared equity agreement or restructure the terms. It’s important to consult both your mortgage lender and the shared equity provider to understand how refinancing will impact your agreements.
How much home equity can I access through a shared equity program compared to a cash-out refinance?
With a shared equity program, homeowners typically access between 10% and 20% of their home’s current market value, depending on the provider and market conditions. In contrast, with a cash-out refinance, you can typically borrow up to 80% of your home’s value, minus your existing mortgage balance. The amount of equity available will vary, but shared equity programs generally provide less upfront cash than a cash-out refinance.
Key Takeaways
- Shared equity programs allow access to cash without taking on new debt or monthly payments.
- Cash-out mortgage refinance increases your loan balance and requires monthly payments.
- Both options tap into your home equity but impact your ownership and future equity differently.
- Evaluating your financial goals and home’s expected appreciation will help you decide which option is best for you.
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