UNLOCK IS A SMART ALTERNATIVE TO A TRADITIONAL LOAN THAT HELPS HOMEOWNERS GET
CASH BY TAPPING INTO THEIR HOME'S FUTURE VALUE. IT'S ONE OF THE BEST OPTIONS FOR
PAYING OFF LARGE PURCHASES, DEBT, OR FUNDING HOME IMPROVEMENTS.
With average household debt (and debt to income ratios) on the rise
[https://www.cnbc.com/2022/01/11/amid-rising-prices-us-households-fall-deeper-in-debt.html],
fewer homeowners are able to qualify for a home improvement loan. What if you
could tap into your home’s future value to get a loan? Now you can with a new
financing product that gives you cash in exchange for a small share of your
future home appreciation. No monthly rates. No need for immaculate borrower
requirements.
Home Equity Investments are an emerging method of financing that folks use to
renovate their home, finance an ADU, or just pay off other debt. While there are
plenty of companies in the home equity investment space, like Hometap, Unison,
Point, and Splitero, today we’ll be focusing on Unlock, and everything you need
to know about their product.
For an overview of all of the other top Home Equity Investment lenders, take a
look at our article that reviews the best home equity investment lenders
[https://www.dwellito.com/learn/the-best-home-equity-investment-lenders-for-your-guesthouse].
WHY USE A HOME EQUITY INVESTMENT INSTEAD OF A LOAN FOR YOUR ADU?
Since there are so many means of traditional financing for your ADU, you may ask
yourself, “Why use a Home Equity Investment?”.
NO MONTHLY PAYMENTS
The short answer is, because there aren’t any monthly payments that come along
with a Home Equity Investment. How it works is you pay the lender back at the
end of your investment’s term (10-30 years), or once you sell or refinance the
property.
No risks on a variable interest rate
Conventional loans like HELOCs or cash-out refis aren’t as borrower friendly.
HELOC’s often come with variable interest rates, and all bank loans have monthly
payments. Whereas home equity investments are paid back in a lump sum at the end
of your loan, and payment amount is calculated by how much you refinance or sell
for.
EASY TO QUALIFY
Debt based financing can also come with pesky hoops to jump through. You need a
debt-to-income ratio of 45% or less. This is hard when your mortgage is high and
you are paying 30-50% of your income on a mortgage payment.
To get a great interest rate, you need a 720+ credit score and a low
loan-to-value ratio.
Home Equity Investments are based on the property, not the person, so there are
less rigid requirements and more cash to pull from.
MORE CASH FOR YOUR PROJECT
Conventional loans allow you to pull out a percentage of your home equity to use
on your home improvement. For example, if you need $100k for a remodel, you’ll
typically need at least $110k worth of home equity. This could take years to
build up.
If you use a renovation loan like Fannie Mae Homestyle Renovation Loan
[https://singlefamily.fanniemae.com/originating-underwriting/mortgage-products/accessory-dwelling-units],
you’ll be able to get more cash to pull out. This is because these loans
calculate the home's post-renovation value instead of its current home value.
One of the hidden downsides with renovation loans is that they lend out the cash
in draw schedules that can often dissuade contractors from taking on your
project. Contractors can be resistant to the idea of getting reimbursed for
materials and other high upfront costs. This limits the talent pool of
contractors you can draw from.
NO MONEY WASTED ON HIGH INTEREST RATES
Lastly, as of the time this article is being written, interest rates are on the
rise. If you are financing home improvements with an interest based loan,
chances are your interest rate is quite high. With a Home Equity Investment, you
can simply buy out the investor with a cash-out refinance when interest rates
come back down. This flexibility allows you to lock into a traditional product
at a better rate.
UNLOCK HOME EQUITY INVESTMENT HIGHLIGHTS
When comparing Home Equity Investment companies, there are specific numbers to
help you gauge which one is best. In order to make the process dead simple,
we’ve put together some of the most important information you need to know about
Unlock below:
Use our Home Equity Investment Calculator
[https://www.dwellito.com/home-equity-investment-calculator] to see the
financing options across 5 of the top lenders.
UNLOCK PROS & CONS
Although Home Equity Investments are a great option for some, it’s important to
understand the downsides to inform your decision. To help you get a better grasp
of the benefits and drawbacks of Unlock, we’ve put together some pros and cons
below:
PROS
* There aren’t any high fees for “risk adjustments” with Unlock.
* Unlock offers a Maximum loan amount of 43.75% of your home’s value (capped at
$500,000).
* Their 500 minimum credit score requirement makes it easy for most to qualify.
* Unlock does not share in the added value of improvements, meaning the equity
gained from your ADU is yours to keep!
* Unlock invests in most residential real estate (single family, condominiums,
2-4 unit properties and townhomes) and rental properties.
* No long period of lock-in. You can buy them out after 6 months. You can also
do a partial buyout.
CONS
* Investments are only offered in 15 states but they are expanding.
* Unlock will not invest in properties raw land, co-ops, prefabricated homes,
or properties owned by multiple investors.
* Unlock shares in your total home value as opposed to just the appreciation.
Their share percentage is lower but they share in the total home value.
* Typically Unlock only offers 10-year term investments, which makes them a
less desirable option for those looking for a long-term investment. This
could also be a “Pro” depending on your goals.
REAL-LIFE SCENARIOS
Below we’ve run through a couple of potential real life scenarios to help you
understand how Home Equity Investments work.
To make things simple, we’ll assume that $100,000 is lent based on a $1,000,000
home, with Unlock receiving 17% of the homes future value in all scenarios.
Below, we’ve put together a table that shows how much you might pay if said
home increases/decreases in value by 20%, and if the value remains stagnant.
HOW TO QUALIFY FOR AN UNLOCK HOME EQUITY INVESTMENT
According to Unlock’s website, there are no income requirements to receive a
home equity investment. They only require homeowners to have at least 20% equity
in their home, and a minimum credit score of 500.
When it comes to credit score, so long as there aren’t any defaults/bankruptcies
on your credit report, obtaining a 500 credit score can be possible.
SUMMARY: IS UNLOCK WORTH IT?
To make a decision whether Unlock is right for you, consider the following
points.
Unlock makes it easy to qualify, and they don’t have any risk adjustments on
their investments. This means that they are truly being paid based on your
house's rising value, not on a steeply discounted cost basis.
Unlock can be a great option for homeowners who are adding an ADU to their
property since they don’t share in improvement-based appreciation. If you want
to refinance after your ADU is built, you won’t have to worry about paying a
percentage of the value created by your ADU. Remember, this isn’t the case with
all Home Equity Investment lenders; some share in improvement appreciation too.
A couple of areas to consider are their investment term length, their 20% home
equity requirement, the total home value percent they share in, and if you live
in a city that they serve.
Lastly, one of the most helpful resources to help inform your decision is our
handy Home Equity Investment Calculator
[https://www.dwellito.com/home-equity-investment-calculator]. If you’d like to
further explore the possibilities and compare multiple lenders, be sure to run
the numbers.
