There's a New Way to Tap Your Home Equity - Before It Exists

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Home equity loans and home equity lines of credit can be invaluable wealth-creation tools -- the latter can even be turned into checking and savings accounts. And odds are, you're fairly familiar with both options. Even if you've never used them, they've been heavily advertised by banks for decades.

Now, however, there's a new variation on using your home's equity: You can get an investor to buy a portion of any future equity you may acquire on the property.

Unlike with a traditional home equity product, the money you receive is not a loan but an investment. You'll pay no interest, and you're free to do with the funds whatever you see fit. EquityKey offers its home appreciation rights agreement only in selected areas, and there are other limitations.

For Example

Let's say your home is worth $500,000, and you have a mortgage balance of $200,000. This means you already have $300,000 equity, which remains yours. An investor will pay between 6 percent and 17 percent of your home's appraised value, in return for 30 percent and 75 percent of the future appreciation in the home (if any). The appreciation calculation is based on the S&P/Case-Shiller Home Price Index, which tracks 20 major U.S. markets, and not the actual value of your home.

If you make improvements in your property that cause it to be worth more money, that added value won't be part of the calculation of what you owe your investor. Any equity you obtain by paying down your debt is yours to keep. It's only the portion of any market-based gain that will be shared with the investor.

Let's assume you sell 50 percent of the future equity for $90,000 and that the starting value of your index is 100. Fifteen years later, you want to sell. The index is 200, meaning your home has now doubled in value to $1,000,000. The investor will be owed $250,000, half the $500,000 appreciation.

Let's also assume you had paid your home off during that time. You will walk away with $750,000 in cash from this transaction -- minus your costs of sale. If the market does nothing or goes down, and you decided to take the option of not having to pay back any of the investor's investment, you would have received less money at the beginning, but would owe none of it back.

'Maybe' Equity

Why might you consider this? A good play might be to put some of your "maybe" equity into "for sure" lifetime retirement income. This would be done by purchasing a solid fixed indexed annuity with a lifetime income rider. In the example, in 15 years, that income rider would have somewhere between $200,000 and $350,000 inside of the annuity. If you then took a 6 percent draw from that income rider every month, you'd get a $1,000 to $1,750 monthly lifetime income stream for both you and your spouse, no matter how long either of you lives -- all paid for with a portion of your "maybe" future equity.

Perhaps you'd rather retire debt, help with college costs, diversify your holdings, or contribute to a charity. The choice is yours.

True, if your property value went up that much during that 15 years, you might have been better off to keep 100 percent of the future equity. But nobody can know if real estate values will go up or down, or remain relatively stagnant. Real estate is no different than any other investment. It can create wealth or steal it, depending on when you buy and sell, and at what price.

Some Other Considerations
  • The EquityKey program isn't yet available nationwide; It's currently available in most of California, Florida, New York, New Jersey, Connecticut, and soon Chicago.
  • The property must be your personal residence or a second home that is not used for income purposes.
  • The property must have no more than 65 percent of total debt load against the current value.
  • If you sell within seven years of signing up, you may be subject to fees and/or the return of some of the investment made by the fund.
  • There are certain minimum property values based on your local pricing.
This type of program isn't meant for people who are struggling financially but rather a sophisticated wealth-building and retirement tool.

John Jamieson is the best-selling author of "The Perpetual Wealth System" and each week promotes a free training video of the week.

Does Your Home Live Up to the American Average?
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There's a New Way to Tap Your Home Equity - Before It Exists
In 2013, the median lot size of a new sold single-family house was 8,596 square feet, or just under 0.2 acres. While that might not seem like a lot for you suburban homeowners, a regional breakdown shows that the small average size isn't due to urban inhabitants alone. The Northeast enjoys the largest average lot, at 13,052 square feet, while the less densely populated South and West lay claim to just 8,649 square feet and 6,796 square feet, respectively.
From a footprint of 1,650 square feet in 1978, the average American home has grown 50 percent, to 2,478 square feet. Yet tough times seem to be squeezing our expansionary attitude. Although new single-family homes sold in 2013 clocked in at a median 2,478 square feet, single-family homes completed in 2013 amounted to just 2,384 square feet. Homebuilder confidence has plummeted into pessimism in the last few months, hinting that the housing market's road to recovery might be rougher than expected.

While birth rates have held relatively steady for the past 40 years, everyone apparently needs more elbow room. The share of homes with four or more bedrooms has jumped from 27 percent in 1978 to 51 percent in 2013. And where would a bedroom be without a bathroom? While just 8 percent of 1978 homes had three or more baths, 37 percent of homes now fall in that category.

From 2008 to 2013, both the share of homes with four or more bedrooms and the share of homes with three or more bathrooms have jumped 10 percentage points, while median square footage is up 10.9 percent for the same period.

If there's one strong sign of new housing demand, it's home prices. After nose-diving during the Great Recession to a median sales price of just $216,700, home prices have been roaring back up. In 2013, the median sales price for a new single-family home was $268,900. But for those on the housing hunt, don't be discouraged. Home prices today still don't hold a candle to costs in 2006, according to the well-regarded Case-Shiller Home Price Index. In 2006, the index topped 200 before plummeting to less than 140, and current rates put the index just above 170.
It is America, after all. Our industrialized nation was built on the back of Henry Ford, and America is in no danger of breaking its automobile addiction. In 2013, a whopping 300,000 of the 429,000 new single-family homes sold included a two-car garage. And 98,000 new homes included a three-car garage -- the highest amount since 2007. Of all new homes built, only 10,000 failed to include a garage or carport.
American homebuyers are building bigger homes than ever before. But if there's one thing the recent recession has shown us, bigger isn't always better. Although 30 percent of Americans believe real estate is the best long-term investment, homeownership isn't for everyone. There are plenty of reasons to spend less or invest elsewhere -- and leave keeping up with the Joneses to Mr. and Mrs. Smith.
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