Equity sharing agreement vs. home equity loan vs. second mortgage: what to consider
When it comes to financing a home purchase, there are a variety of options available to potential buyers. Two of the most popular methods are taking out a home equity loan or getting an equity sharing agreement. But what's the difference between these two options, and which one is right for you?
A home equity loan is a type of loan that is secured by your home equity, or the value of your home minus any outstanding mortgages or liens. This loan can be used for a variety of purposes, including home improvements, debt consolidation, or other major expenses. A home equity loan typically has a fixed interest rate and monthly payments, and you may be able to borrow up to 85% of your home's equity.
An equity sharing agreement, on the other hand, is a contract between you and another party, such as an investor, in which you agree to sell a portion of your future equity in the property in exchange for upfront cash. With an equity sharing agreement, you may be able to avoid monthly payments, but you will give up some of the future value of your home.
So, which option is right for you? That depends on a variety of factors, including your financial situation, your plans for the property, and your tolerance for risk. Here are a few things to consider when making your decision:
- If you need cash now: If you need money for a major expense or to consolidate debt, a home equity loan may be the better option, as you'll be able to access the funds right away. With an equity sharing agreement, you may have to wait until the property is sold to receive your money.
- If you're comfortable with risk: An equity sharing agreement involves selling a portion of your future equity, so it's important to be comfortable with the risks involved. If the value of your property goes down, you could end up owing money to the other party.
- If you plan to sell soon: If you're planning on selling the property in the near future, an equity sharing agreement may be the better option, as you won't have to worry about repaying a loan.
- If you have good credit: If you have good credit, you may be able to qualify for a home equity loan with a lower interest rate than an equity sharing agreement.
- If you need flexibility: With a home equity loan, you'll have a set monthly payment and repayment period. An equity sharing agreement gives you more flexibility, as you can sell your portion of the equity at any time.
No matter which option you choose, be sure to do your research and understand the risks involved. Speak with a financial advisor to get more information about home equity loans and equity sharing agreements to see which one is right for you.