
How home equity investments work<\/h2>\n
Home equity investments provide a unique way for homeowners to access cash by selling a portion of their home’s future value. Here’s a step-by-step explanation, followed by an illustrative example:<\/p>\n
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- Agreement with an investment company:<\/strong> Homeowners enter into a contract with an investment company, selling a stake in their home’s future value in exchange for a lump sum of cash now.<\/li>\n
- No monthly payments: <\/strong>Unlike a loan, there are no monthly payments. The homeowner continues to own and live in their home.<\/li>\n
- Settlement at the end of the term: <\/strong>At the end of the agreed term (10 years, for example) or when the home is sold, the investment company receives a percentage of the home’s appreciated value.
<\/div><\/li>\n<\/ol>\nHome equity investment example<\/h2>\n
Let\u2019s look at an example of how a home equity investment would work. For clarity, we\u2019ll use a $300,000 home value. This could be how much your paid-off home is worth, or how much equity stake you own in the property.<\/p>\n
If an investment company buys a 20% stake in your home equity and your home is worth $300,000, it would give you a $60,000 lump sum.<\/p>\n
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- Your home’s current value: $300,000<\/li>\n
- Amount of cash you need: $60,000<\/li>\n
- Investment company’s stake: 20%<\/li>\n
- HEI contract term: 10 years<\/li>\n
- Home’s annual appreciation rate: 3%<\/li>\n<\/ul>\n
At the end of 10 years, the home appreciates to approximately $403,175. The homeowner will need to pay back the original investment ($60,000) plus the investor’s 20% stake in the home’s appreciation ($20,635). In this case, the payback amount would be about $80,635.<\/p>\n
Below is a table that shows the breakdown of this HEI scenario, and what happens if, for some reason, the home depreciates in value \u2014 since it is an investment venture, after all.<\/p>\n
- No monthly payments: <\/strong>Unlike a loan, there are no monthly payments. The homeowner continues to own and live in their home.<\/li>\n