Home Equity Investments (HEI) are gaining traction as a financial tool that allows homeowners to tap into their home equity without taking on an additional monthly payment. In fact, debt consolidation can be one of the most valuable applications of HEI. HEI offer several advantages over traditional home equity financing for homeowners looking to streamline their debt and improve cash flow. Here’s how an HEI works, and why HEI may be a smart move for homeowners focusing on consolidating high-interest debts.
1. Lump Sum Payment
HEI provide a lump sum of cash that, among other things, can be used to eliminate or pay down high-interest debt, such as credit card balances, personal loans, or auto loans. In doing so, homeowners can simplify their financial management and reduce monthly debt expenses.
Example: A homeowner receives $60,000 through an HEI. Prior to the HEI transaction, the homeowner had $20,000 in credit card debt with a 19% APR, $10,000 in personal loans with a 12% APR, and $15,000 in auto loans with a 7% APR. This homeowner could theoretically use a portion of their HEI to pay off all three outstanding high-interest debt balances. In this instance, the homeowner effectively consolidates or pays down their high-interest debt, reduces or eliminates their monthly debt payments and, by retiring these debts ahead of schedule, may reduce the total amount of interest they pay over time.
2. No Monthly Payments
One of the standout benefits of an HEI as compared to a traditional closed-end loan or home equity line of credit (HELOCs) is that HEI do not require any monthly payments. Without the obligation of a monthly payment, homeowners can free up cash flow to manage other expenses or pay down other debt more efficiently. The “no payment” feature of an HEI can provide homeowners with greater financial flexibility both in the near-term and over time.
3. Term Length Considerations
Different HEI products typically offer flexible maturity dates, with maximum terms usually ranging from 10 years, on the low end, to 30 years, on the high end. And, as mentioned, during the term of their HEI homeowners do not have to make any monthly payments, and therefore can enjoy the benefits of improved monthly cash flow from their lump sum HEI by paying down existing debt or other obligations. Note that it’s important to keep in mind that at the end of the term—after either a set number of years or when the homeowner sells or refinances the property—part of their home’s appreciation in value (if any) will be shared with their HEI provider. Prior to taking an HEI, Homeowners should consult with others and carefully consider a range of factors, including how long they plan to stay in their home and whether the HEI terms, including the termination date, align with their overall financial goals.
Key Considerations for Debt Consolidation with HEI
1. Future Appreciation Sharing
When entering into an HEI agreement, homeowners agree to share a percentage of their home’s future appreciation with the HEI provider. While this offers immediate cash for uses such as debt consolidation, it’s essential for the homeowner to understand the long-term impact of an HEI. If the home’s value significantly increases, the homeowner will share a portion of that growth with the HEI provider. The percentage shared will be determined at the beginning of the HEI. Homeowners should speak with trusted advisors as well as their HEI provider to understand the terms of their particular agreement before signing. When choosing to take an HEI to consolidate or pay down debt, balancing the need for immediate debt consolidation versus retaining 100% of their future home equity is crucial to determining if an HEI is right for you.
2. Financial Stability
Although HEI do not require monthly payments, financial stability remains critical. Homeowners should discuss with their trusted advisors and ensure they can meet ongoing expenses, property costs, and any unexpected financial challenges that might arise over time. With the removal or reduction of high-interest monthly debt payments, after careful planning, homeowners may find it easier to maintain financial stability.
Conclusion
HEI present a unique solution for homeowners looking to reduce or consolidate debt without adding to their monthly financial burden. By offering a lump sum of cash and the ability to eliminate monthly payments through debt reduction, HEI make it easier for homeowners to manage and potentially reduce their total debt burden. However, it’s always vitally important to discuss with your financial and other advisors, and consider the long-term impact of sharing future home appreciation to ensure an HEI aligns with your personal financial goals.
At Aspire, we understand that taking an HEI is a significant financial decision. We’re here to help homeowners evaluate whether an HEI might help achieve certain financial objectives.
To see how much cash might be available for you, check to see if your home is eligible today!
