Can’t qualify for a HELOC? Fintechs will buy a stake in your home – Boston Herald

A new generation of fintech companies is offering American homeowners a different way to leverage their home equity: If you’re sitting on a pile, these investors will buy part of your home.

The condominium arrangement is not cheap, but it presents an alternative to workers on leave or laid off who are no longer eligible for home equity loans or cash refinances.

You get the money now, and your new co-owner is participating in the rise – or perhaps the fall – in the value of your home when you sell it.

“This is a real risk-sharing product,” says Eoin Matthews, co-founder of Point, one of the real estate investors.

Other players in this new niche include Noah, Hometap and Unison. Newcomers are rooted in a financial reality that has emerged over the past decade: While many American homeowners have seen their real estate wealth grow, turning that wealth into cash isn’t always easy.

“Most Americans are rich in assets and sensitive to cash flow,” says Noah founder Sahil Gupta.

U.S. homeowners held a record $ 18.7 trillion in home equity at the end of 2019, according to the Federal Reserve.

According to ATTOM Data Solutions, 14.5 million homes in the United States are “equity rich,” which means home-backed loans represent less than half of the market value of properties.

An enviable situation for owners, but accessing this wealth is not easy, especially for the self-employed or those with unequal income.

“When they want to get a bank loan or a home equity loan, it becomes difficult,” Gupta explains.

Home equity investors generally follow the same scenario. First of all, you will need a lot of equity in your home. Point requires 30% or more, while Noah requires at least 25%. So if your home is worth $ 400,000, your mortgage balance might not exceed $ 280,000 to $ 300,000.

You will also need to live in a place where companies do business. Point purchases shares in parts of California, Washington State, Oregon, Colorado, New Jersey, and other states. Noah is in California, Utah, Washington, Colorado, and Oregon.

Hometap operates in California, Florida, Maryland, Massachusetts, New York, North Carolina, Oregon and Virginia.

Bad credit is usually not a barrier. Point requires a credit score of only 500 – although it seems unlikely that a homeowner sitting on a cache of equity in their home would have such a low score.

Point and Noah will both write checks for amounts ranging from $ 35,000 to $ 350,000.

This concept has become popular in the fintech world. Point investors include Silicon Valley venture capitalist Andreessen Horowitz and former Citigroup chief executive Vikram Pandit.

These home equity investments are not loans, so there is no monthly payment. Instead, your new partner gets a claim on the appreciation of your home, an obligation that matures when you sell.

Point offers a scenario based on a $ 50,000 investment in a $ 500,000 house. In this example, Point sets what he calls a “risk-adjusted home value” of $ 425,000, and he keeps 20% of any appreciation above that number.

Suppose the owner sells in five years and the house has appreciated to $ 608,300. This is an increase above Point’s value of $ 183,300, so the owner gives Point 20% of that amount, or roughly $ 36,700.

The owner would repay Point the original loan of $ 50,000, plus a portion of the increase in the value of the house for a total gain of $ 86,700. This equates to an annual percentage of over 12%. In other words, it is not cheap money.

In this example, the numbers break down like this:

– Home value: $ 500,000

– Present value of points: $ 425,000

– Sale price five years later: $ 608,300

– Appreciation: $ 183,300

– 20% reduction in points: $ 36,600

– Effective interest rate: 12.1%

If a home’s price skyrockets, Point’s return is capped between 15% and 20%, Matthews says.

“It must be better than a credit card,” he says.

In contrast, home equity line of credit rates fell to 4.25%.

If the price of the home dips beyond the present value of the business, the owner will pay back one point less than the initial investment.

Matthews says Point typically takes 25% to 35% of a home’s appreciation. This number will vary depending on factors such as the owner’s equity in the home, the owner’s credit history, and the property’s appreciation potential.

There is also an upfront fee. Homeowners pay a fee of 3% of the real estate investment, plus appraisal fees and other closing costs.

Point has completed several thousand transactions and their typical client obtains an investment of $ 85,000. After the charges, the owner receives a check for about $ 81,000, Matthews says.

Joe Zeibert, Managing Director of Nomis Solutions, describes the concept of home equity investing as “super attractive”. For homeowners, however, there is an obvious downside.

“You absolutely give up all potential,” says Zeibert. “If you are going to be in this house for 20 years you should know that you are giving a lot of your appreciation. “

Real estate investors are seeing their product gain in appeal during the coronavirus pandemic. Fearing a recession, lenders are wary of home equity lines of credit and cash refinances, two traditional ways for equity-rich homeowners to tap into their real estate wealth.

One of the real estate investors, Unison, said he has “temporarily suspended” offers to homeowners as the coronavirus disrupts housing markets. Point has also retreated, although Matthews says the business is already in the process of restarting.

“We’ve cut back a lot,” he says, “but we’re still funding some clients. “

He predicts that Point will return to normal trading pace by the end of June.

About Sally Dominguez

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