Buyers Alert: Should You Trade Future Home Equity for Down Payment Help?

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Fewer Americans are homeowners these days—but it’s not because they don’t want to be. Home prices are rising, mortgage rates are up, and saving for a down payment while trying to keep up with sky-high student loan, rent, and just-about-everything-else payments is no easy feat.

Enter Unison Home Ownership Investors. The San Francisco-based company (formerly called FirstREX) is helping aspiring home buyers come up with their down payment—in exchange for a hefty stake in their abode. Hey, nothing in life is free. And this deal has its share of strings attached.

The loan product is designed for those with strong credit who can secure a standard mortgage and come up with at least 10% of that down payment. It was originally designed for more expensive properties with jumbo mortgages and was expanded to folks seeking smaller mortgages over the summer.

“It makes it a lot easier for more people to afford homeownership,” Jim Riccitelli, co-CEO of Unison, says. “They don’t have to settle for a smaller home or an area that’s not attractive to them.”

How to score help with a down payment

Here’s how it works: Buyers trade their future home equity for the money they need to come up with a 20% down payment—the magic number that typically saves them from having to pay mortgage insurance each month.

They then have 30 years to pay back the investment, and no interest is charged. When they sell the property (or when the 30 years are up), they’re on the hook for the initial investment. And they are not permitted to rent out the home.

“We’re an investor in the property,” Riccitelli says. But “we don’t have any occupancy rights. They own their home.” That means owners are responsible for leaky roofs, property taxes, insurance, and everything else.

But here’s a big catch. If the home has gained value, the owners must fork over what they owe plus 35% of the increased property value. So if they borrowed $20,000 on a $200,000 home and prices shot up to $250,000, they’d need to pay back that $20,000—plus an additional $87,500.

“The downside to the buyer is that there is an unknown cost to the funding,” Riccitelli says. “It’s possible that the funding may have cost more than if they had borrowed the money.”

If the home value is still the same, buyers need only to refund Unison’s investment.

The silver lining is that if the home decreases in value, the buyer owes what Unison gave, minus 35%. So the buyers who were given $20,000 by Unison would need to pay the company back only $13,000.

To make sure buyers understand the risks, they are required to read a guide, watch a video, and chat over the telephone with a specialist before signing up. Both borrowers, if they are a couple, must also pass a review process similar to a test with 20 questions.

Who’s eligible for the down payment assistance?

Unison’s clients are typically millennials with the jobs to afford the pricey mortgage payments in expensive cities like San Francisco and New York. But although cash is flowing in, they struggle to save up for those huge down payments and keep up with their student loan payments and exorbitant rents, Riccitelli says. Other fans of the program simply prefer to save for retirement rather than a home purchase.

The loan product is available in 12 states and the District of Columbia: Arizona, California, Connecticut, Oregon, Washington, Illinois, Massachusetts, Maryland, New Jersey, New York, Pennsylvania, Virginia, and Washington, DC. It is slated to expand to eight more states this year.

So far, it’s been a boon for Ricardo and Catherine Soto when they wanted to buy a $650,000 home in Chula Vista, CA, according to the Los Angeles Times. The couple, who have three teenagers, were able to come up with only a 10% down payment on the San Diego-area property, even after selling their old home.

So to come up with 20%, and therefore avoid paying mortgage insurance, they turned to Unison. The company chipped in $65,000 toward the down payment.

“For our personal situation, what was most critical was having access to discretionary income because our kids will be going on to college,” Ricardo, 50, told the Times. “Having that lower payment and knowing I can count on that was really important.”

He was also pleased to know that if the home depreciates in value, he won’t be required to repay everything he borrowed.

“I’m not planning 30 years out,” he told the Times. “I’m just hoping to get through the next eight.”

What to consider before signing away your future home equity

Cash-strapped buyers shouldn’t just rush to sign up, though, cautions financial planner Jenna Rogers of Mission Wealth, in Santa Barbara, CA. They might be losing a good chunk of money if they do, as home values are projected to keep going up.

“Over the long run, [it] can be really expensive,” Rogers says of giving up home equity. “My recommendation is if someone is not able to come up with the down payment for a home via current savings/investments, they should continue saving and postpone the purchase.”

There are also other down payment assistance programs available, offered through local governments, that won’t cost buyers quite so much—if anything at all, says Sean Moss, senior vice president of operations at Down Payment Resource. The Atlanta-based company connects buyers, real estate agents, and lenders to various aid programs throughout the country.

“The equity in your home is part of your retirement nest,” Moss says. “There are [other] programs that will get you thousands to tens of thousands of dollars, without giving up equity in your home.”

The post Buyers Alert: Should You Trade Future Home Equity for Down Payment Help? appeared first on Real Estate News & Advice | realtor.com®.

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