Can I Get Cash from My Home if I Have No Equity?

Posted by  on Apr 02, 2010

Dear Liz, Please advise if you can help in the following situation: My mother owns a home currently worth around $1.3 million. Because of the recession, it is down from its former value of $1.6 million but should go back up when the recession eases. There is little or no equity in the house at present and we would like to borrow $60,000. My mother has years of superb credit but recently was hit by the recession and now has minor blemishes on her credit such as late payments on credit cards, but nothing too serious. Can you assist us? Please advise.

Very truly yours, Paul

Dear Paul,

The recession has dealt many people like you and your mother a double blow--money is tight and home equity has dried up. But there may be a solution for you.

Equity Sharing arrangements are relatively new financial products that could allow you and your mother to access her home's future equity--that anticipated increase from $1.3 million to its former $1.6 million. Here's how it works: Equity sharing companies allow you to take a lona for 10% to 15% of your home's value--in your case that would be $130,000--and in exchange they want an equal share of the property's increase in value, plus the principal balance back. The amount you repay depends on how much your home increases in value.

So, if you borrow $130,000 for five years, and the property gets its value back to $1.6 million, half of that $300,000 gain belongs to the equity sharing company. Your total repayment would be $280,000--the $130,000 borrowed, plus half the $300,000 gained, or $150,000. This amounts to approximately 15% interest, although these companies don't refer to their profit as interest.

However, if you were allowed to borrow 15% of your home's value, or $195,000, you'd repay $345,000, and your interest rate would effectively be 11.5%. If your property only appreciated by $150,000, you'd repay $270,000, with an effective interest rate of only 6.5%! Finally, if your property value actually decreased by $100,000, you'd only be responsible for repaying $145,000 of the $195,000 borrowed--the equity sharing company shares in your losses too, not just your gains.

You can terminate the equity sharing agreement at any time you like, but if you do it within five years there are penalties. In the first year, a fee equal to 25% of the advance payment is charged if the agreement is cashed out, and this drops to 20% in year two, 15% in year three, all the way to zero after year five. You are required to maintain the property, pay your taxes on time, maintain your insurance, and keep up with your current mortgage payments. In addition, you cannot refinance your first mortgage or take on additional home equity debt without the approval of the equity sharing company.

Because equity sharing income isn't considered "interest," it isn't regulated the same way mortgage lending is, and consumers have less protection and less disclosure. That makes it more important than ever to read everything and shop carefully for the best mortgage "interest" rates. Your loan costs are determined by the fees charged, the amount of cash advanced, and the amount of equity you're expected to pony up.

This kind of an arrangement can be an expensive way to borrow. But in today's economic environment, it may be the only way to borrow.

Good luck, and thanks for writing,



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