What's the Difference Between an Equity Sharing Agreement and a Reverse Mortgage or HELOC?
If you're a homeowner, you may be considering tapping into the equity in your home to supplement your income. But what's the best way to do that? Should you enter into an equity sharing agreement, get a reverse mortgage, or take out a home equity line of credit (HELOC)?
Each option has its own pros and cons, so it's important to understand the difference between them before making a decision. Here's a look at the key considerations for each option:
Equity Sharing Agreement
With an equity sharing agreement, you'll enter into a contract with another party (usually an investor) in which they agree to provide you with a lump sum of cash upfront in exchange for a portion of the future equity in your home.
One of the main benefits of this arrangement is that you won't have to make any monthly payments, as the investor will only receive their money back when you sell the property or refinance the mortgage. This can be a good option for seniors who want to stay in their homes and don't want the burden of making monthly payments.
However, there are some risks to be aware of with an equity sharing agreement. First, you'll have to give up a percentage of the future value of your home, so if the property appreciates more than expected, you'll lose out on some of that potential profit. Additionally, if you decide to sell the property before the contract expires, you may have to pay a penalty to the investor.
A reverse mortgage is a loan that allows seniors to tap into the equity in their home without having to make monthly payments. The loan is repaid when the borrower dies, sells the property, or moves out of the home.
Reverse mortgages can be a good option for seniors who want to stay in their homes and don't have the income to make monthly payments. However, there are some downsides to be aware of. First, the interest on the loan accrues over time, which can eat into the equity in your home. Additionally, if you don't stay in the home for the rest of your life, you may have to sell the property to repay the loan.
A home equity line of credit (HELOC) is a loan that allows you to borrow against the equity in your home. Unlike a reverse mortgage, with a HELOC you'll need to make monthly payments on the loan.
HELOCs can be a good option for homeowners who need access to cash but don't want to take out a traditional second mortgage. However, there are some risks to be aware of. First, if you don't make your payments on time, you could lose your home to foreclosure. Additionally, if interest rates rise, your monthly payments could increase, putting a strain on your budget.
So, which option is right for you? That depends on your individual circumstances. Be sure to speak with a financial advisor to help you make the best decision for your needs.