Get Clarifying The Different Forms And Policy Objectives Of Shared Equity

Whether a home equity loan is a good idea will depend on your individual situation. For example, taking out a home equity loan could be ideal if you: Know exactly how much you need to borrow and prefer receiving a lump sum payment.

Home equity sharing agreements are generally best for people whose poor credit or temporary financial difficulties could make it difficult to qualify for a traditional loan. Here's how they work, the benefits and drawbacks, and who they are right for.

Once approved for a shared equity agreement, you will receive a lump sum cash advance from the company in exchange for a portion of your home's future appreciation. The amount that you receive will depend on your home's value, your credit score, your LTV ratio and the terms of the agreement.

Equity sharing owners share the initial costs of buying the property, including down payment and closing costs. These costs are called “Initial Capital Contributions”. The owners also share the costs of major repairs and improvements and these are called “Additional Capital Contributions”.

Shared equity programs preserve affordable homeownership opportunities by allowing borrowers to purchase homes at below-market prices. In exchange, borrowers agree to sell the property only to other income-qualified buyers and at a restricted sales price.

Shared equity homeownership is a self-sustaining model that takes a one-time public investment to make a home affordable for a lower-income family and then restricts the home's sale price each time it is sold to keep it affordable for subsequent low-income families who purchase the home.

So, for a 20-year, $100,000 home equity loan, you could expect a slightly higher rate than on a 10-year term. In this case, let's say you qualified for an 8.85% rate. This would result in a monthly payment of $890 — much lower than the payment on a 10-year term.

For select qualified borrowers, a home equity sharing agreement can be the most manageable option available for accessing cash. For most homeowners, however, the advance they receive may not be worth the equity that they'll have to give up later.