There's a New Way to Tap Your Home Equity - Before It Exists
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.
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.
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.
John Jamieson is the best-selling author of "The Perpetual Wealth System" and each week promotes a free training video of the week.