Alternative Home Equity Loans—Unregulated, Costly, and Dangerous
Credit seems to be easing a little, which means maybe the Government’s move to purchase shares of banks is working. I don’t think credit will ever be as assessable as it was just a couple years ago, which has meant opportunities for those with extra cash. Not only can you invest directly in people through peer-to-peer lending sites; now you can get home-equity loans through investors.
Some investment firms are now striking deals with cash strapped homeowners who can no longer take out equity in their homes because of the tightened lending standards. Investors are basically lending money to homeowners in exchange for a share of their homes future value, usually around 30-50 percent. The loan is repaid along with your homes added equity when you sell your home. I know, I can’t believe it either. What makes anyone agree to something like this? There are no interest payments made during the life of a contract is a big reason.
Is this a good deal? I don’t think so. It can work out in favor of the homeowner, but really only if they are in desperate need of cash. Consider this example. A homeowner takes out a $50,000 “equity” loan from an investor. In seven years the homeowner decides to move, so he/she sells their house. During the seven years, the home increased in value by $100,000. So, not only does the homeowner have to pay the traditional fees in selling their home, but they now have to pay their debts for their “equity” loan. After paying back the investor the original $50,000 they also have to give up 50 percent of their equity, which is an additional $50,000—virtually wiping away any equity gained over seven years.
I’ll be a little fair and say if your house actually loses money over the seven years (above example); the investor would also be losing out. You can’t ignore the fine print in these deals either. If you terminate the contract within 5 years, you could face a steep penalty. This is in addition to various other contractual problems that can be worked into the agreement. One last thing, these types of loans—better characterized as investments—are fairly new, thus unregulated. We have all see where unregulated markets can get us. Be careful if approach by one of these offers, consider all your options before signing on the dotted line.$
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I agree. Taking equity out of one’s home or other real property is not only against the American Dream but it’s a bad idea in general. Someone in my family owned a retail business and eventually purchased the unit for that business. Everytime he gained equity he would take out a loan to pay off the deficits he accumulated from his retail business. This eventually lead to the downfall of his business.