Home ownership investment is a new concept that could change the way you view your lifestyle. Here's what you need to know.
It’s always exciting when a brand new concept changes the way we conduct our financial lives, opening up new possibilities that did not exist before. We’ve seen this happen time and time again, from mobile banking apps to free online credit scores to peer-to-peer loans. Of course, it’s not always easy to know which ideas will have a big impact.
The idea of a home ownership investment is quite new, and yet it has the potential to make the kind of impact that could reshape the real estate industry and change how people buy (and own) homes. Of course, you’re probably wondering, “what is it?”
The Basics of a Home Ownership Investment
Traditionally, there have been only two ways to finance a home purchase — you can pay out of your own pocket or you can get a loan. Most people today use some combination of these two ways when purchasing a new home.
Likewise, there have been two main options for unlocking home equity — either sell your home or take out a loan against the equity.
However, there is now a third option — you can use a home ownership investment to pay for part of the down payment on your new home or to unlock equity in your current home. Unlike a loan, there are no monthly payments and no interest charges.
A home ownership investment company provides money that allows them to invest alongside you in the purchase of a home, and in exchange they will share a portion of the future change in the home’s value. For example, if your home’s value increases, they would share a fraction of the gains whenever you sell the home, and more importantly, if the value decreases, they would share a fraction of the loss with you.
Buying a Home Using a Home Ownership Investment
So how does this make it easier to buy a home? It gives you, the home buyer, a source of patient capital to use for your down payment. In other words, you bring a certain amount of money to the table and the home ownership investment company does too. Those funds combined together become your down payment.
Here’s an example: let’s say you want to buy a home that costs $400,000 but you only have $40,000 saved up for the down payment. You could use a home ownership investment to get another $40,000 — which equals a total of $80,000. With that money, you can get approved for the mortgage and keep your monthly payments manageable, while still getting the home you wanted in the first place.
A home ownership investment can increase your purchasing power by up to 20% in some cases. It could also allow you to reduce monthly mortgage payments by several hundred dollars and avoid paying private mortgage insurance which is often required by lenders on 90/10 loans.
Accessing Home Equity with a Home Ownership Investment
The good news is a home ownership investment can help current homeowners too — not just home buyers. It allows you to quickly and easily unlock the equity in your home without getting a HELOC or home equity loan. You get money up front in exchange for sharing a portion of your home’s future price appreciation (or depreciation).
Let’s look at an example: you purchased your home 15 years ago and have made your monthly payments while also seeing the estimated value of your home increase over time. Today, your home is worth $500,000 and your outstanding mortgage balance is only $250,000. That means your equity in the home is worth $250,000. You could get a home ownership investment of $50,000 which comes with no monthly payments and no interest charges.
You can use that money for whatever purpose you’d like, including remodeling your home, paying off debt, or sending your kids to college. Since you don’t need to make any payments until you sell the home, you now have greater flexibility and control of your finances.
How to Decide if a Home Ownership Investment is Right for You
With any type of financial product, it’s always important to read the fine print and evaluate the pros and cons before taking the plunge. Education is key to making an informed choice. While this new type of home financing certainly has its advantages, it’s not for everybody.
The best way to compare your options is to run the numbers and see how exactly this type of program would affect your finances — and how much it might cost you. Look for online calculators that can help you compare different scenarios. Be sure you understand all the terms of any agreement before making a decision.
One of the wonderful things about all the new financial innovations happening today is that they give us choices, and usually more choice means better outcomes for consumers. If you are a home buyer or homeowner looking for financing, a home ownership investment could be the right choice for you.