A new loan product called a “shared equity agreement” allows borrowers to take out money and pay nothing back until they sell their property. Sound too good to be true? That’s because it is.
Here’s the catch: the borrower must agree to pay back the money borrowed plus half of the home’s appreciation value between the time they entered into the agreement and the date of sale.
A Reuters article explains:
“Under the Rex Agreement, a homeowner with a $500,000 house can get $71,429 now in exchange for a 50/50 split on the home’s appreciation (or depreciation) going forward. Over the last 20 years, single-family home prices have gone up 6.5 percent a year, according to industry data compiled by data360.org. If the home appreciates 6.5 percent a year for 10 years, that means that in 2018, the home would be worth $938,568. The homeowner would owe Rex $71,429 plus $219,284, half of the appreciation, for a total of $290,713. If, instead, the homeowner borrowed $71,429 at 10 percent interest — higher than the current going rate for second mortgages for good credit risks — he would end up paying $41,844 in interest, for a grand total of $113,273.
Why the huge disparity? Part of it is because these figures don’t account for the time value of money; that the homeowner would be paying off that loan over 10 years and not at the end of 10 years. But most of it is because the shared appreciation agreement effectively leverages the issuer’s money: They’re giving the homeowner roughly 14 percent of the home’s value and getting appreciation on 50 percent of its value. In effect, though the deal isn’t structured as a loan, they are “lending” $71,429 but getting an expected 6.5 percent interest on $250,000.”
When you put it that way, it doesn’t seem like such a great deal.
On the flip side, many of these shared equity agreements benefit the borrower if his home equity declines at the time of sale. Should the property decline in value, the lender will pay for half of the loss. That’s a feature many HELOC borrower probably wish they had at this point.
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