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There is a new way to take cash out of your home with no monthly payments and no interest. It's not a loan. It's not a mortgage. It is a contract with an investor who wants to purchase some of your home equity in cash—but it can be costly in the end.
California-based Point is a 2-year-old fintech company specializing in home equity contracts. It offers homeowners cash for a share of the home's equity, that is, the amount the home is worth beyond the value of the mortgage. It will give up to $250,000 depending on the value of the home and the strength of the real estate market that the house is in.
"This started four years ago from personal experience. I was in between jobs and looking to get a refinance to invest in my business, but I was denied by all the banks," said Eddie Lim, co-founder and CEO of Point. "Why is debt financing my only option? The irony is the biggest asset I own, the biggest asset that most of us own in our lifetimes, all we can do is add more debt, so that's where Point came in."
Point is the broker in the deals and funnels the contracts to investors. It just got $100 million in potential contract backing from Kingsbridge Wealth Management.
Here's how it works: Let's say the home is appraised at $1 million. It has a $500,000 mortgage on it, so there is $500,000 in equity. The homeowner needs $100,000 in cash, so they enter into a contract with Point, which looks at the local market, the borrower and the home and evaluates the risk on the deal. Point then lowers the value of the home by, let's say 15% in order to cushion the risk that the home's value might fall or that the borrower might not be able to pay them back. That puts the home's value at $850,000.
The homeowner has up to 10 years to end the contract and pay off the contract to the investor. Point does charge a 3 percent fee upfront. In addition, when the contract is ended, the investor — Kingsbridge for example — gets the $100,000 back plus a percentage of the home's appreciation over the term of the contract, let's say 30% in this case. Since it has already devalued the house in the contract, even if the home doesn't appreciate at all, the investor is still getting $45,000 over and above its investment. If the home falls in value, the investor takes a hit.
"We're providing liquidity to homeowners. It's not necessarily a home financing strategy but a personal finance strategy," said David Dunn, founder and president of Kingsbridge. "As an investor we do expect equity-like returns because we're taking equity-like risk. If the home price goes down, we participate in that, whereas your mortgage lender does not."
If the homeowner does not pay the contract back, Point can foreclose on the home, but in a foreclosure it would take a back seat to the primary mortgage lender. Point is, therefore, taking a risk, which is why its return can potentially be so high.
Greg Hart was house rich, but cash poor, and he and his wife wanted to pay off some debt. They did not want a home equity loan, and his credit score was likely too low to qualify anyway.
"To go with a regular HELOC [home equity line of credit] meant I was trading one payment for another, and I didn't see that would get me any further ahead," said Hart, whose Thousand Oaks, California, home was appraised at around $600,000.
Instead, he saw an ad for Point and looked into it. He then entered into a contract for $50,000.
"It was one of the easiest processes I've ever done, especially in regards to refinance or a mortgage," said Hart. "I feel it is a viable alternative, and a very important alternative, for people who have no other options, and this is a good one for them because if you've got the equity in the home why not use some of it to do something for your house."
So far demand has been very strong, according to Lim. Point has done 300 equity contracts in 15 states, and with the new backing from Kingsbridge, Lim said he expects to grow tenfold in just the coming year.
"There are 25 million households in American today where their credit score is below 700, and there is over $100,000 of wealth in the home, so that's a vast segment of customers, nearly 50 percent of homeowners in fact, who are not eligible for Fannie or Freddie mortgages," said Lim.
The huge run-up in home prices in the last three years has given homeowners a big boost in equity. Total home equity nationally now stands at $9.8 trillion, about $6 trillion of which could be tapped under normal bank underwriting standards for second loans, according to Black Knight. These generally require that the homeowner retain 20% equity in the home.
Point's home equity contract is more expensive than a traditional home equity loan, because Point, and its investor, get that percentage of the home's appreciation. So far, Lim said Point's clients have used the cash to pay down debt, invest in other opportunities, and to help deal with messy divorces, where otherwise the family might have had to sell the home.
At the end of the contract, the homeowner can either sell the home to make the payoff or refinance into a traditional loan. Hart expects to refinance, because the extra cash has already helped him raise his credit score.
"I can now see light at the end of the tunnel and be able to do things that we've long needed to do. It's just like we're moving again. We're moving forward again," he said.