Hope this page helps you figure out what you need to look out for when selecting a financing solution for you and your family.
Here are some quick facts to know about the various forms of financing.
30 y fixed mortgage
30 y fixed mortgage is a loan secured by a borrower’s home that is paid off in 30 years or 360 monthly payments at an interest rate that won’t ever change.
HELOC (Home Equity Line of Credit) – is a line of credit secured by a borrower’s home that provides borrowers with a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans such as credit cards.
Reverse mortgage or HECM (Home Equity Conversion Mortgage) – per reversemortgage.org:
A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash. The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction on how reverse mortgage proceeds can be used. The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower. The borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as the borrower lives in the home he or she is not required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners insurance, and homeowners association dues (if applicable).
Shared appreciation – sometimes called shared equity is an agreement that allows homeowners to cash out some of the equity in their homes in exchange for giving an investment company a fractional ownership stake in the property. The investor participates in the increase or decrease in the value of the property, but the homeowner retains full homeownership rights. There are no monthly payments and investment has to be paid off with a balloon payment at the end of the agreement term, usually 10 or 30 years, or when the home is sold. The amount of the payment is variable and depends on the amount of the investment, property appreciation, and the length of the agreement.
If your home value went up during a shared appreciation agreement, you pay more than the company originally gave you. If your home value declined, you will (sometimes) pay less than they originally gave you. The companies that provide this financing sometimes claim it is “debt-free” financing as there are no monthly or installment payments during the agreement term. However, you will be responsible for paying a large lump sum (balloon) payment at the end of the agreement. An important note- shared appreciation products are not subject to the regulations and consumer protections found in regular mortgages. They are often structured more like a stock option. This means it is extra important for the homeowner to do their research and carefully review the agreement terms.
Profit participation is a version of the shared appreciation agreement. While investors do not participate in the decrease of the property value, the cost of the profit participation is usually less than that of a shared appreciation agreement. A version of a profit participation agreement allows for a full payoff from the rental income by the end of the term of the agreement.