Many people looking at Unison HomeOwner also check out HELOCs and other traditional options to access the equity trapped in their homes. Because no two individuals or situations are exactly the same, you need to know your options and make the decision that best fits you and your needs.
So, what exactly is the difference between a HELOC and a Unison equity sharing agreement?
As you may know, HELOC stands for home equity line of credit, and it’s a type of capital (debt) you can access by putting up the equity in your home as collateral. The most fundamental difference between Unison HomeOwner and a HELOC is that a HELOC is debt, and an equity sharing agreement isn’t.
Once a lender issues you a HELOC you can borrow against it at any time. You pay interest on what you borrow, and your line of credit terms will determine when you need to repay the balance in full. Contrast this with Unison’s equity sharing agreements, which invest with homeowners and eliminates the need for new mortgages, monthly payments, and interest charges.
HELOCs could a good option for people who want the flexibility of being able to borrow money when they want without having to deal with a large lump sum of cash all at once — and who also want the flexibility of repaying the money they borrowed on their own terms. However, some folks don’t want the additional costs of more debt on top of their existing mortgage loan. They don’t like the idea of having additional monthly payments. For those homeowners, Unison might be a better fit.
Unison HomeOwner will pay you up to $500K or 15% of your home’s value as a home co-investment. This is a one-time payment with no interest. Once approved, the homeowner receives the payment to use however they like. After all, it’s their cash. Unlike a HELOC, equity sharing agreements have no monthly payments and no interest. In exchange for helping leverage their equity, customers provide Unison with a share in the appreciation of the home when they decide to sell, buy Unison out, or 30 years pass. Because it’s a home co-investment, both the homeowner and Unison benefit if the home increases in value over the period of the contract, and both share in the loss if the home decreases in value.
What Are Some Other Alternatives To A HELOC?
HELOCs aren’t the only alternative to Unison HomeOwner. There are also home equity loans, home improvement loans, cash-out refinancing, and reverse mortgages.
Home equity loans vs HELOC: A home equity loan is a loan that uses the equity you have built up in your home as collateral. Since you have the loan payment in addition to your monthly mortgage payment, these types of loans are often called "second mortgages." The monthly payments also include an interest charge--however, there is usually a fixed interest rate that is established from the beginning, so your monthly payments will be the same throughout. The shorter the term you select, the higher those payments are likely to be.
Home improvement loans vs HELOC: Home improvement loans are unsecured personal loans that homeowners use specifically for--you guessed it--home improvements. Because these types of loans do not have collateral (remember, your home is the collateral in a home equity loan), the lender takes on extra risk and tends to charge much higher interest rates as a result. If you miss payments, you won't lose your home, but the lender will likely refer you to a collections agency and your credit will take a big hit.
Cash-out refinance vs HELOC: Cash-out refinancing is the practice of replacing one's current mortgage with a new, larger one, which allows you to access the difference between the two--in cash. The amount of cash is based on the equity that has been amassed in your home. Typically, lenders will allow you to borrow up to 80% of your home's current value. Because you have a new loan, the term will extend further than the previous one, but you may also be able to obtain lower interest rates.
Reverse mortgage vs HELOC: A reverse mortgage is typically only available to those who are age 62 or older and have, typically, paid off most or all of their mortgage. With a regular mortgage, the homeowner makes regular payments to the lender; however, with a reverse mortgage, the lender makes payments to the homeowner. The homeowner can receive these payments on a monthly basis, or as a line of credit, or a lump sum at the beginning, depending on the structure they select. However, only the latter (lump sum) is likely to come with a fixed interest rate; the others tend to have variable rates, which are less predictable. The payments the homeowner receives are tax-free, and they don't need to be repaid until the homeowner decides to move, or they die.
But ultimately, the important thing to remember is that equity products are not one-size-fits-all, by any means! Be sure to investigate all of your options, and discuss them with your financial advisor, if you have one.