What is Home Equity Investing and Why Should You Care?

If "home equity investment" is a new phrase to you, get ready to start hearing it much more frequently. It's a fairly new concept to the market that allows homeowners to get paid now for the equity they’ve accumulated in their properties without getting a loan. In exchange, an investor gets a share of the home’s future appreciation or depreciation. 

There are several instances where homeowners are opting for home equity investments over traditional solutions such as loans, HELOCs, and refinances. One of the most common cases is debt pay-down. Paying off high-interest credit cards, car loans, school loans and other debts with a home equity investment allows homeowners to eliminate the interest without any monthly payments. (Most equity investors have a term of ten years in which the homeowner settles the investment). 

Other common use cases where this solution is often optimal include funding renovations, retirement, college education, purchasing a second property, settling a divorce, or starting or growing a small business. 

How does it work? 

While the details differ from one investment provider to the next (you can see a comparison of some of the options available here), the way a home equity  investment generally works is as follows: 

1. 
   
2. 1. After completing an application, the investment provider gives the homeowner an investment estimate, typically between 5-15% of the home value. 
5. 2. After qualifying, a home appraiser provides a physical appraisal of the home, the same as if they were getting ready to put the house on the market.
8. 3. Based on the appraised value, the investor will prepare an investment offer. Once accepted, funds are transferred typically within three weeks or less. 
11. 4. The homeowner may use the funds however they choose, with no interest or monthly payments. At the end of the term, the homeowner settles the investment, typically by selling or settling with savings or a loan. 
14. 5. The equity investment provider makes a profit from closing costs and their entitled share of the property at the time of the sale or settlement. By investing alongside the homeowner, they partake in the gain or the loss of the home's appreciation/depreciation. 

From an investor perspective, home equity investments offer the never-before-accessible long-term, stable asset class that is residential real estate. 

To date, the awareness around home equity investments is still pretty minimal, but more and more homeowners are seeking an investment over a loan to avoid added debt in the long run, especially in the case of homeowners looking to put some work into their homes to drive up the value before putting the house on the market.