Are you one of the 80 percent of Americans who are struggling with debt, whether it’s credit cards, student loans, or mortgage payments? It’s a vicious cycle — your debt may be stopping you from saving for important life events. Retirement could be nearing, and your savings might not have the padding you thought it would.
Or your children might be reaching college age, and you want nothing more than to give them a head start so they don’t end up in the same student loan situation you faced. Maybe you are tired of leaky faucets, that inefficient furnace, or the old roof, but you don’t have the money for these much-needed repairs. Have you considered that you might be living in the solution?
Currently, 44.7 million homeowners in the United States hold $6.2 trillion in tappable home equity — on average each homeowner has $119,000 in equity but isn’t using it to its full potential, according to a study by data solutions and analytics company, Black Knight Inc.
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Becoming a homeowner is an important life step, and is often one of the biggest financial decisions you’ll make. But of course, as many of us know, the cost of your home doesn’t stop after signing on the dotted line of your mortgage.
Whether it’s home maintenance, home improvement, dealing with the rising cost of living, financial insecurity regarding income, or all of these reasons, a lump sum of cash can help you streamline your financial bottom line today. That’s why some homeowners decide to tap into the equity of their home.
That’s what Jesse Silkoff did. At 24, Silkoff was a new homeowner in need of a roof upgrade on his house, but he had limited experience borrowing money. “I managed to get a mortgage, but from there, I was very ignorant of the process,” Silkoff explains. “I had squeaked every dollar from my personal and business budgets, so there was truly no wiggle room left.”
About 73 percent of homeowners feel “house rich, cash poor” at least some of the time, according to a recent survey conducted by Hometap, a home equity investment company. You might not have any cash in the bank, but your home equity is building. Like Silkoff, when your wiggle room runs out, you’re left with what is most likely your largest asset — your home — without many options of tapping into its value.
What Is a Home Equity Loan?
Equity is the difference between what your home is worth and what you still owe on your mortgage. You grow your home’s equity by making steady payments on your mortgage; if your home value increases over time, your equity grows faster.
The traditional solution for accessing this equity is home equity financing, in the form of a loan or a home equity line of credit (HELOC).
A home equity loan is exactly that: a loan. If enough equity is available to you on your home, you get a lump sum of cash that you pay back monthly at a fixed interest rate over a certain period of time, similar to how you pay your mortgage. The amount of the loan depends on the value of your house, the equity you have built up in it, the amount you want to borrow, your income, and credit history.
Home equity loans are an attractive option due to the fixed monthly payments over a fixed term. The interest rate on the loan is usually lower than a personal loan or a credit card would be. However, it isn’t without its drawbacks.
“The biggest disadvantage is that you’re tying up your home asset,” says financial expert Peter Neeves, Ph.D. “You probably wouldn’t want to take equity out of your home if you may be moving in the next few years. And, of course, you have to have enough equity available to make it worthwhile.”
Following an uncomfortable interaction with the appraiser for his home equity loan — where he alleges she undervalued his house by almost $60,000 — Mike Arman was denied a loan after completing the majority of the loan process and paperwork.
“The loan was declined because the first appraiser claimed there was mold on the bathroom ceiling, and the underwriter said (after we were 97 percent finished) that they don’t do loans where there is a business license at the address,” Arman said.
Arman originally wanted the loan to help finish construction on his current home. With flawless credit, no late payments on any previous loans in half a century, and $85,000 in the bank for one of his businesses, Arman was still denied as the bank did not want his home address to also be a business address.
With a home equity loan, you also pay interest on the entire loan amount, no matter how quickly or slowly you use the funds. And this loan is secured by your house — any missed or late payments could put your homeownership in jeopardy.
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What Is a HELOC?
A home equity line of credit (HELOC) is similar to a home equity loan, but instead of receiving a large lump sum of money, you get access to a revolving line of credit that you can draw from as you need to, just like a credit card.
More flexible than the loan, a HELOC lets you borrow as you need, pay it off, and then borrow again.
“Lines of credit are great if you’re going to be starting a business or doing other projects where your capital need is variable and comes in stages,” Neeves says. “That way, you tap into only what you need and pay interest only on the portion you’re using.”
However, this also means that the monthly payments aren’t fixed like that of the home equity loan, and can change month to month depending on your usage.
“Even knowing the interest rate was variable, I anticipated being able to make the monthly payments,” Silkoff recalls of his HELOC. “But as an entrepreneur whose income varies from month to month, this became difficult once the interest rate spiked. My monthly payment increased exponentially, leaving me cash strapped and stressed.”
Homeowners cite uncertainty of future income as the number-one cause of stress in owning a home, followed closely by rising home maintenance costs, the same Hometap survey revealed. As Silkoff’s experience shows, even being prepared to take out this line of credit may not be enough to handle fluctuating payments if you also struggle with job security or uneven income, a reality of many gig workers and entrepreneurs.
Like Silkoff, Caleb Liu, owner of real estate company House Simply Sold, fell into a HELOC at the age of 24, without any idea what it was or what it meant. Liu was attracted to the idea of “free money” that the bank was offering. But this was right before the 2008 financial crisis, and Liu ended up in debt for about five years.
“I was young and didn’t read through the loan documents. I naively assumed that I could draw on the HELOC any time I needed some emergency cash,” Liu admits. “Well, to my surprise, the bank sent me a letter saying that they were freezing my credit line due to the deteriorating market value of the property.”
Luckily Liu had pulled out some cash from the HELOC, but he had planned on drawing more, and it stalled his business ventures in real estate investing for about five years.
What Is Hometap and How Is It Different?
The reasons that there is so much home equity not tapped into in the United States are the restrictions in place on loans and lines of credit, the laborious application process, and the difficulties in making another monthly payment on top of your mortgage.
Unlike a loan and line of credit, the home equity investment service Hometap doesn’t come with any monthly payments. Yes, seriously.
Hometap is a new loan alternative for tapping into your home’s equity that eliminates having to take on new debt. Hometap offers a home equity investment, meaning the company invests in your home, gives you an agreed-upon lump sum payment upfront, in exchange for a share in your home’s future value.
If your home goes down in value, Hometap doesn’t ask for a guaranteed return on the money invested like loans and lines of credit do, either. Hometap says that by investing alongside homeowners, they share in both the appreciation and depreciation of the home value. That means that if the house depreciates in value by the time of settlement, Hometap could receive less than what they invested.
Unlike a lender, there's no guarantee that they profit or receive the full investment amount back. And because they value transparency, Hometap homeowners are fully informed about how Hometap’s percentage would change in every scenario before the investment is made, using an interactive tool they call their Scenario Planner. Similarly, if your home goes up in value, so does the value of Hometap’s investment.
It works like this: Hometap prepares an estimate based on the information that you provide about your home (you must have accrued at least 25 percent equity in your home). If after reviewing Hometap’s estimate you decide the company is the right fit, you fill out the official application. If you accept Hometap’s offer, you get the money upfront in exchange for a Hometap investment in your home for up to 10 years.
Hometap prides itself on being transparent about each step of the process, including how an appraiser is chosen to survey your home and the process.
Hometap pulls data points from eight national automated valuation providers (AVM), then has an expert home appraiser review photos of the home to arrive at an accurate home value.To this effect, you can be confident you’re getting the best evaluation for your home.
After the 10 years is up, or when you sell your home, Hometap receives its share of the home value either from the sale of your home or you buy them out with another form of financing. While Hometap invests in single-family homes and condos, the company does not invest in vacation homes: You must live at the property for at least half the year. You also must put Hometap’s name on your property deed — this is to protect Hometap’s investment in case of a breach of contract.
There is a 3 percent service fee and closing costs that include notary, escrow, appraisal, etc., which are deducted from the investment amount when you get your money, so you pay no “out of pocket” expenses.
And remember: Just like a loan or line of credit, if you do not meet your payment obligation (in Hometap’s case, at the end of the 10-year term), you risk losing your home.
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How Hometap Could Help You
Aside from lack of monthly payments, what are the advantages of Hometap over traditional routes? Allison Alley, who took out two HELOCs over 12 years to fund a business and help finance the building of a second home, says not being a standard W-2 worker was a setback with HELOCs.
“My husband is an entrepreneur, which means our income can be more unpredictable and more complicated than banks like to see,” Alley says. “We are not ‘in the box’ people with standard W-2s and straightforward tax returns, our debt-to-income or debt-to-equity ratios sometimes seem to suggest a higher risk profile even though we have never defaulted on a mortgage.”
“Our experience in obtaining mortgages or HELOCs from banks has been negative, and the application and approval process stressful,” she added.
Alley and her husband came across home equity investing through marketing materials from another company, and despite not understanding the concept at first, conducted their own research as the concept of instant cash with no monthly payments attracted them. “It seemed a little too good to be true, but Hometap was amazing at answering questions — and we had a lot of them.”
Again, because of income requirements and ratios, Alley says she and her husband would not easily qualify for a conventional home equity loan, but Hometap offered an easy-to-follow solution to tapping home equity. “It was frustrating to have such a valuable property with no liens on it and not be able to qualify for a home equity loan,” she says. “Hometap was perfect for us because the company was more concerned about the value of the house than about the consistency of our income.”
Unlike Alley’s experience with HELOCs, the Hometap process was “straightforward and transparent,” she says.
Everything happened in the timeframe that was laid out to Alley, and overall her experience using this method of financing was a positive one. Alley does mention, though, that she and her husband would have liked a provision that allowed a discount for paying off Hometap earlier than the 10-year term, which the company does not provide.
While Hometap doesn't offer a “discount” per se, there can be a benefit to settling an investment before the ten-year term is up. In addition to having no prepayment penalties for settling early, unlike many financing solutions in the space, Hometap observes an annual cap of 20 percent that protects homeowners in the event their property sees rapid appreciation in a short amount of time. Hometap believes homeowners should reap the benefits of that appreciation — they've earned it. So often, settling earlier in the term means settling for less than the agreed-upon share.
Hometap is currently available in the following states:
- New Jersey
- New York
- North Carolina
There are advantages to each kind of home equity financing; it’s important to identify which is best for you and your financial and life situation. The advantage of Hometap and a home equity investment means that you won’t be burdened with monthly payments on top of your mortgage and other responsibilities.
If you need cash payment soon, Hometap can get the investment ready for you in as little as three weeks. The maximum amount they can invest in your home is $300,000.
The application process is smooth, the third-party appraisers Hometap uses to value your home are vetted, and the company communicates with you every step of the way.
However, if the house you live in is your home for life, Hometap may not be the best decision for you, and you should consider the alternatives. A HELOC could be great if you need cash incrementally; a home equity loan could work if you want lower interest rates than a personal loan.
“If you have credit problems or if you have spending problems, which will ultimately lead to credit problems, you should not use a home equity loan in any form,” Neeves advises. “You need to solve that credit or spending problem first, before you take on any new debt, especially something tied to your home.”
However, if you are a responsible credit user, Neeves says equity financing can be a great option. “If you are confident about staying in the home for the duration of your loan, there’s no significant downside.”
Do your research, shop around, and choose what’s right for you.