Mortgage Research Network Podcast

Welcome to the Mortgage Research Network Podcast. This podcast brings you the latest in mortgage and real estate news 3 times a week. The audio is AI generated, but content is fact-checked by me, Tim Lucas, editor of MortgageResearch.com and a former mortgage professional. And with me is Craig Berry, a mortgage originator with 25 years experience.

Hi everyone.

Today we're talking about home equity agreements, also known as home equity sharing agreements or HESA’s.

What if I told you there's a way to get cash from your home without making monthly payments? It sounds too good to be true, but a new financial product is turning traditional home equity on its head.

You're talking about these home equity agreements, right? Where you basically sell a stake in your home's future value?

Exactly. And here's what's really interesting. take a $750,000 home. Through one of these agreements, you could get $75,000 cash today as an example. Instead of monthly payments, you're just sharing the future appreciation with an investor.

So walk me through how that actually plays out in real numbers.

Well, using that same example, let's assume 3.5% appreciation per year over 10 years. That means your home is worth $1,058,000 a decade from now. In that case, you'd end up paying back about $180,000. That's the original $75,000 plus $105,000 of shared appreciation. It works out to roughly a 9.1% APR. And these are all numbers from one of the bigger home equity sharing agreement firms. But here's the key: no monthly payments.

That's quite different from traditional financing. Who's actually using these agreements?

You know, it's fascinating. they're particularly popular with self-employed people, retirees, and those recovering from credit issues. Think about someone with plenty of home equity but irregular income. Traditional lenders might turn them away, but these agreements don't care about monthly income. But keep in mind that there are predatory lenders out there who are just looking to capitalize on distressed homeowners who are behind on monthly bills. So, in the end, this could be dangerous for many consumers.

But could be a life saver too, especially with today's interest rates hovering around 8-9% for traditional home equity loans, and the payments that come with those rates. What are some of the other downsides people should know about?

The biggest one is that you're giving up a chunk of your future appreciation. In hot markets, that could end up being significantly more expensive than a traditional loan. Plus, there are those upfront fees of 3 to 5% of the amount, and you'll have a lien on your property that could complicate future refinancing.

So it's really about weighing those trade-offs against the benefit of no monthly payments.

Exactly. And what's fascinating is how people are using these agreements in creative ways. They're not just for financial emergencies anymore. We're seeing people use them for major renovations, business startups, even debt consolidation.

So they're becoming more of a strategic financial tool rather than a last resort.

Precisely. And there's built-in protection too. If your home value drops, many agreements limit your downside risk. You might just owe the original amount back. It's really changing how people think about home ownership.

What happens if someone wants to get out early? Are they locked in?

Actually, there's more flexibility than you might think. You can buy out the agreement with cash, or refinance your mortgage to cover the payoff amount. Some companies even allow partial buyouts over time. But timing is crucial. If home values are rising quickly, you'll want to get out sooner rather than later.

That's good to know about the exit options. But what about when it comes time to sell the house?

Well, while it doesn't prevent you from selling, it definitely adds another layer to manage at closing. You'll need to repay the investor their share from your proceeds. If you're short on proceeds, you might need to negotiate with the company or cover it from other assets.

So in the end, it really comes down to your individual circumstances and comfort level with sharing your home's future value.

Exactly. And I think that's what makes these agreements so interesting. They're challenging our traditional understanding of home ownership. We're moving away from the simple own-or-rent binary and creating this hybrid model where you can monetize your ownership while still living in and controlling the property. It's really a sign of how financial innovation is giving homeowners more options than ever before.

That's about all the time we have for this topic, but we go into even more detail on the site. To learn more, type home equity agreement into the search bar at Mortgage research.com. We'll see you next time on the Mortgage Research Network Podcast.