Real Estate Law | Explore options carefully when looking to tap home equity
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Dear Mr. Feichthaler:
I have been hoping to take out an equity line to fix a few items at the house, but the interest rates continue to be high. Plus, on a retirement income, I am not sure I qualify for a typical HELOC. Recently, I have been hearing commercials on the radio for "Hometap," it says you can get money out of your home without any interest, monthly payments, or adding to debt. Sounds too good to be true? Should I contact them to access my home equity?
– Meghan T.
Dear Meghan:
Lingering higher interest rates have caused many of us to look to alternatives to conventional borrowing. I, too, have heard the commercials for Hometap, and concluded it must be similar to a reverse mortgage. How else could a company provide you funds and receive no monthly payments?
Well, Hometap takes the position that they aren't loaning money, rather they are "investing" in your home. This is a good description, because the end result is that Hometap (or the assignee they sell your contract to) could own a portion of your home.
The typical agreement provides for a 10-year investment before the "investment" is required to be paid off. The company will record a mortgage against your property to protect their "investment".
The costs of this "investment," in my opinion, are staggeringly high. First, there is an "investment fee" paid for by you, not the investor, of 4.5% in the beginning. This comes off the amount you are receiving, along with taxes appraisal, and title charges. All told, over 6.5% comes off the amount "invested" to provide you net proceeds.
So, how does Hometap get paid back? The standard term is 10 years. At the end of 10 years, you may be required to satisfy the debt by selling the house, refinancing, or other means. Hometap, at the end of 10 years, will own over 23% of the TOTAL market value of the property. Assuming a 5% annual increase in value of the home, the net result is a payment of over 300% of the original amount borrowed. The typical agreement "Caps" the annualized rate of return at 20%, unfortunately, the preceding number is well within the cap.
Homeowners who borrow with Hometap can also pay off the debt during the 10 years, and a payoff would be required to be made upon default. Default would include not paying property taxes or insurance. If you died while this borrowing was in place, your heirs would be required to follow the same terms.
I have a few clients that believed that Hometap only receives their money back if the property increases in value. This is not accurate. Hometap receives a 17% interest in your home IMMEDIATELY. If you sold the property one year later, they would be entitled to an ownership of 17%, but at least would be capped by the 20% annualized return. Even if the property value declines they still have a substantial interest in your property, to which they will be entitled to be paid.
Homeowners seeking to utilize the equity in their home should carefully investigate other alternatives, such as an equity line or a cash-out refinance. Even a standard reverse mortgage typically has better terms than what Hometap provides.
Every borrower has unique reasons to borrow. However, barring a dire emergency need for funds, or if you are aware of an investment you know will exceed a 20% annual return, it is hard to justify the short and long-term costs of "investments" like this. Plus, nothing you pay to Hometap will be tax deductible, in contrast to a standard home equity line of credit, with interest that may be tax deductible. You won't have "debt" in the traditional sense, but you will have an obligation to repay.
If you decide to pursue the Hometap "Investment" option, carefully compare other alternatives. I would recommend you speak to other lenders, an attorney, and anyone you know that may have a better option for you.
Eric P. Feichthaler has lived in Cape Coral for over 37 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Cape Coral to practice law and raise a family. He served as mayor of Cape Coral from 2005-2008, and continues his service to the community through the Cape Coral Caring Center, and Cape Coral Kiwanis where he serves as president. He has been married to his wife, Mary, for 24 years, and they have four children. He earned his board certification in Real Estate Law from the Florida Bar, and primarily practices in real estate law and wills and trusts. He is AV Preeminent rated by Martindale-Hubbell for professional ethics and legal ability, and is a Supreme Court Certified Circuit Civil Mediator. He can be reached at eric@capecoralattorney.com, or 239-542-4733.
This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations.