Home Equity Investment 101: The Basics

If you're strapped for cash and aren’t sure where to find the funds to get caught up, you may want to look at cashing out on your home equity.

Whether you’re looking to pay off credit card debts, make renovations to your home, or try to take care of an unexpected bill, tapping into your home equity can be the solution. 

One of the best ways to use your home equity is to invest in a co-ownership opportunity with Balance. But what if you don’t know what a home equity investment is or how it works? In this guide, we will take a look at the basics of home equity investments.

Home Equity Investments Explained

A home equity investment is a financial strategy that involves converting your existing home equity into cash. Unlike a home equity loan or cash-out refinance, a home equity investment is not considered debt and has no interest rate. 

Homeowners convert the equity in a property's value for cash to access the necessary funds to achieve their goals. It could be a great way to pay down debt, pay off your mortgage, pay for home improvements or unexpected expenses, or something else.

When you enter into a home equity sharing agreement, you’ll offer to sell a certain amount of your home's future value in exchange for cash, typically allocated towards debt consolidation, home repairs, credit improvement, or savings.

The buyer of the equity, also known as the investor, only shares in the part of the equity they've invested in - not all of it.

In most cases, you can “buy out” the investor (effectively repurchasing the equity you’ve sold previously) once you’ve built up enough money to do so. However, through home appreciation, the investor tends to make a profit on that sale as the housing market usually trends upward.

How Does a Home Equity Investment Work?

Most home equity investments work with a straightforward arrangement. You sell a percentage of your home’s future equity, such as 20%, in exchange for a lump-sum cash value, like $20,000. The appraised value of your home will impact how much you’ll get from this financial product.

You can buy back that equity in the future, but usually for a higher price (such as $30,000). This, of course, depends on the investment company and the future appreciation that they predict for the portion of your home equity they own.

The home equity investment process typically follows the following steps:

• Some equity investors send out a third-party appraiser, a neutral party in the arrangement, to determine your home’s current valuation. This tells the investor how much they should spend for your home’s current equity based on its future profitability. Other investors will review market tools to determine property value without an appraisal. They review recent sales, property condition, and future performance to determine their starting numbers.
• If the equity investor thinks it will be a good deal, they may make you an offer for your equity. The offer document will include how much cash you may qualify to receive, how much equity you need to share, and repayment terms. 
• If you agree with the terms, you can enter the agreement and pay any associated closing costs. 

Co-Owning Your Home With Balance

Balance Homes is a co-ownership solution with a mission to help American homeowners stay connected to the homes they love by offering a flexible alternative to traditional financing when life circumstances change. Our model also focuses on long-term financial health and education, helping homeowners understand their options, manage their equity, and build a plan that fits their needs.

Ready to get started? Get your free proposal today.

Sources:

Home Equity: What It Is, How It Works, and How You Can Use It | Investopedia

Need cash? Now you can sell the equity in your home to investors | CNBC

Equity Sharing Lets Homeowners Sell 'a Slice' of Their House. Should They? | Money.com

My lender offered me a home equity line of credit (HELOC). What is a HELOC? | Consumer Financial Protection Bureau