Home values are hovering at near record highs. For many homeowners, their home is their most valuable asset and home equity can be a significant source of their wealth.
Homeowners can leverage the value of their home, such as in the form of a home equity loan and home equity lines of credit (HELOC). They may use their home equity funds to try to increase their property value by repairing or renovating the home to prepare it to sell. They may also use home equity funds to eliminate private mortgage insurance (PMI). But consumers often find that home equity financing can be overly complicated. A 2022 survey of U.S. borrowers indicated that approximately one-third of respondents thought getting a mortgage was more difficult than buying a car (31%), applying for jobs (29%) and applying to college (26%).
Further, home equity loans and HELOCs are not without drawbacks. Borrowing against your home equity means the mortgage balance stays high, interest rates add costs, borrowers can find themselves owing more than their home is worth, credit scores can suffer, and, in the worst cases, homeowners could lose their homes due to missed payments.
Those risks beg the question: Are home equity loans and HELOCs the best options?
Leveraging Home Equity Without a Loan
Because real estate professionals are often trusted sources of information for homeowners, they may face questions over financing options. Agents should always advise their clients to speak with mortgage lenders and financial experts over their personal financing matters. But technology could help them find some answers, too. Financial technology (aka fintech) companies are offering real estate professionals and consumers alternative financing options that may be worth exploring.
For example, Unlock Technologies (a fintech company focused on helping consumers improve their financial status) has created a financing option—a home equity agreement (HEA)—that allows homeowners to leverage home equity without taking on a loan. The concept is fairly simple: Homeowners receive an interest-free lump sum of cash in exchange for a share of their home’s future value. Because an HEA is not a loan, there are no monthly payments. The qualification threshold is lower than traditional home equity loans and HELOCs, making HEAs an option for a wider population of consumers. Income requirements are also lower, so HEAs may be a better option for homeowners who are self-employed, retired or who may lack a steady income.
HEA funds can be used for any purpose, including home renovations or repairs, consolidating or eliminating debt, education expenses or funding a business. Homeowners can access the wealth created via their home equity while retaining the title to their homes and avoiding additional debt.
Other potential benefits of Unlock’s HEAs include streamlined application and approval processes, including an online estimate feature that takes only minutes and won’t impact credit scores. Unlike reverse mortgages, HEAs are available to property owners of all ages, and applicants do not need perfect credit to qualify.
An Unlock HEA includes a home improvement adjustment, which means that homeowners who make significant improvements to their homes retain the value added from those improvements.
An HEA is completed when one of the following scenarios plays out: A homeowner buys back their equity in one lump sum at any point during the 10-year term; a homeowner makes a partial buyout of Unlock’s investment; or, a homeowner settles Unlock’s investment when the home is sold.
Curious how it works? Assume your home value was $600,000. You choose an “Investment Payment” of $60,000—10% of your home’s value. Your exchange rate is 2.0%, so your “Unlock Percentage” is 20% (10% x 2.0). If you sell your home later for $750,000, the Unlock Share is 20% of that $150,000 gain in value. For additional examples, check out Unlock’s Product Guidepdf.
It’s also important to point out, that fintech companies like Unlock are not lenders. In fact, Unlock is a team of finance, mortgage and real estate leaders dedicated to helping consumers create more financial flexibility.
The Benefits for Real Estate Professionals
Home equity funds are plentiful. Current market data indicates that, as of August 2024, U.S. borrowers held $17.6 trillion in home equity collectively, with $11.5 trillion of that considered tappable. Further, U.S. mortgage data indicates that three in five homeowners have at least $100K in available equity.
Real estate professionals add tremendous value when they let clients know that they can have access to these funds, especially when home equity is used to repair or renovate homes. After all, every party in a real estate transaction benefits when top condition homes sell for market value in a competitive real estate landscape.
In addition to funding home improvements, homeowners carrying high debt loads can access their home equity via HEAs to pay down debt and qualify for better mortgage rates when buying their next home. Also, homeowners who are looking for investment or rental properties can use HEAs to fund down payments.
With high interest rates, growing personal debt and sky-high home equity values, homeowners are looking for alternative financing options. Innovative fintech solutions have the potential to expand beyond traditional home lending to include more people at more stages of their lives. Real estate professionals who are part of that financial transformation can build trust and relationships that benefit everyone.
Read more on NAR
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If there is a home that you would like more information about, if you are considering selling a property, or if you have questions about the housing market in your neighborhood, please reach out. We’re here to help.
