Disclosure

This article is provided for general educational and informational purposes only and is not intended as legal, tax, investment, estate-planning, or financial advice. Home Equity Investments, Home Equity Agreements, and Shared Equity Agreements are not traditional loans, and their terms, costs, settlement provisions, property requirements, eligibility requirements, and treatment of future home value vary by provider and program. Reverse second mortgages are loans, and interest accrues on outstanding balances. Program availability, qualifications, costs, loan amounts, interest rates, property requirements, age requirements, repayment provisions, and other terms are subject to change. Homeowners remain responsible for their existing mortgage and applicable property obligations. Accessing home equity may reduce the equity ultimately available to the homeowner or the homeowner's estate. Home values may increase or decrease, and future appreciation is not guaranteed. Consult appropriate financial, tax, legal and/or estate-planning professionals regarding your individual circumstances before making financial decisions.

Beyond Traditional Home Equity Loans: Two Ways to Access Equity Without Refinancing Your First Mortgage

For homeowners who want to preserve their existing first mortgage and avoid another required monthly mortgage payment, a Home Equity Investment or reverse second mortgage may be worth exploring.

For many homeowners, today's home equity presents an interesting dilemma.

You may have built substantial equity in your home but accessing it could mean taking out another loan with a monthly payment — or refinancing a first mortgage you would rather leave alone.

That can be especially frustrating if you already have a low first-mortgage rate.

Traditional options such as a HELOC or home equity loan may allow you to access equity without refinancing your first mortgage. But those options come with required monthly payments.

What if you want access to some of your home's equity without refinancing that mortgage and without adding another required monthly principal-and-interest payment?

For qualified homeowners, there are less-traditional options worth understanding.

Two of them are a Home Equity Investment (HEI) and a reverse second mortgage.

They can accomplish some of the same goals, but what happens after you receive the money is very different.

And that difference could have a significant effect on how much equity remains in your home years from now.

First, What Is a Home Equity Investment?

You may see these programs described by several different names:

• Home Equity Investment (HEI)
• Home Equity Agreement (HEA)
• Shared Equity Agreement (SEA)

Although individual programs and terminology vary, the basic concept is different from a traditional mortgage or home equity loan.

With an HEI, a qualified homeowner receives cash based in part on the available equity in the property.

There is no traditional interest-bearing loan balance and no required monthly principal-and-interest payment.

Instead, the homeowner agrees to settle the investment in the future based on the terms of the agreement. The amount ultimately due is tied to the home's future value or change in value according to the particular program's formula.

The homeowner continues to own the home.

The important thing to understand is that an HEI isn't free money.

The homeowner is receiving money today in exchange for giving the HEI company a financial interest tied to the home's future value.

What Is a Reverse Second Mortgage?

A reverse second mortgage is different because it is a loan.

For qualified homeowners age 55 or older in California, a reverse second may provide access to a portion of the home's equity while leaving the existing first mortgage in place.

There is no required monthly principal-and-interest payment on the reverse second.

However, unlike an HEI, interest does accrue on the money borrowed.

If the homeowner doesn't make voluntary payments, that interest is added to the amount owed. Future interest is then calculated on the growing loan balance, causing the balance to increase over time.

The homeowner may choose to make voluntary payments to reduce how quickly that balance grows, but monthly mortgage payments are not required as long as the homeowner continues to meet the obligations of the loan.

The amount a homeowner may qualify to receive depends on several factors, including age, home value, existing mortgage balance and available equity.

Generally, an older homeowner may be able to access more equity than a younger homeowner with otherwise similar circumstances.

Why Would Someone Want to Access Their Home Equity?

Home equity can represent years — sometimes decades — of mortgage payments and increasing property values.

For some homeowners, accessing a portion of that equity may provide financial flexibility without having to sell the home.

The money might be used for:

• Home improvements or repairs
• Medical or unexpected expenses
• Paying off higher-payment debt
• Creating additional financial reserves
• Supplementing retirement resources
• Helping family members with a significant financial need

And for some parents, there may be another reason worth considering:

Creating a living legacy.

Rather than thinking only about the equity their children may eventually inherit, some homeowners may choose to use a portion of their equity during their lifetime to help an adult child purchase a home.

That could mean helping with a down payment, closing costs or other eligible expenses associated with becoming a homeowner.

There can be something particularly meaningful about helping your children while you're still here to see the difference it makes.

Of course, accessing home equity simply because it's available isn't necessarily a good financial decision. The homeowner's own financial security should come first.

But when there is a specific purpose for the funds, understanding the available options can help a homeowner decide whether accessing some of that equity makes sense — and, if it does, which approach may be the better fit.

The First Mortgage Can Stay Right Where It Is

This is one of the most important reasons homeowners may want to understand these options.

Imagine having a first mortgage with an attractive interest rate and needing $75,000 or $100,000 from your home equity.

A cash-out refinance would replace the entire first mortgage.

That means you wouldn't simply be borrowing the additional money you need. You would also be refinancing the balance you already owe.

An HEI or reverse second may allow a qualified homeowner to access equity without replacing the existing first mortgage.

For someone happy with the rate and terms of their current mortgage, that distinction can be extremely important.

No Required Monthly Mortgage Payment Doesn't Mean No Cost

This may be the most important part of the entire comparison.

Neither option requires a traditional monthly principal-and-interest payment.

But that doesn't mean either option is free.

The cost simply develops differently.

With a reverse second mortgage, time matters.

Interest accrues on the outstanding balance. If the homeowner doesn't make voluntary payments, the balance continues to grow over time — regardless of whether the home's value increases.

With an HEI, the home's future value matters.

There isn't a traditional interest-bearing loan balance growing each month. Instead, the eventual settlement amount is determined according to the HEI agreement and the home's future value or change in value.

That creates a very different financial tradeoff.

What If the Home Doesn't Appreciate Very Much?

This is where the difference becomes easier to understand.

Suppose two homeowners access the same amount of equity.

One uses an HEI.

The other uses a reverse second mortgage.

Now imagine that many years pass and the home's value changes very little.

The reverse-second balance would still have grown because interest continued to accrue during those years if the homeowner chose not to make voluntary payments.

The HEI wouldn't have a traditional interest-bearing balance compounding during that same period.

That does not automatically mean the HEI would cost less, because the eventual HEI settlement depends upon the specific agreement, including how the starting property value and future settlement amount are calculated.

But limited home appreciation is one situation where an HEI may deserve particularly close consideration.

Now, What If the Home Appreciates Substantially?

Turn the example around.

Suppose the property increases substantially in value over many years.

The reverse second mortgage doesn't receive an agreed percentage of the home's appreciation. Instead, the amount owed is based on the loan balance and the interest that has accumulated.

An HEI works differently.

Because its eventual settlement is tied to the home's future value or appreciation according to the agreement, significant appreciation could substantially increase the amount ultimately owed to the HEI company.

In that situation, the reverse second could potentially produce a more favorable long-term result.

Neither outcome can be known in advance because no one knows exactly what a home will be worth years from now.

That's why comparing these options isn't simply about asking which one gives you more money today.

HEI vs. Reverse Second Mortgage

So Which One Is Better?

There isn't one answer for every homeowner.

An HEI may be worth exploring when avoiding both a refinance and another required monthly payment is important, particularly when the homeowner is comfortable exchanging part of the home's future value for access to equity today.

A reverse second may be worth exploring when the homeowner wants to preserve the existing first mortgage, doesn't want a required payment on the new second mortgage, and would rather have the eventual cost determined by a loan balance and accrued interest than by sharing in the home's future appreciation.

The homeowner's age can also make a difference because age is one of the factors used to determine how much may be available through a reverse second.

And there's another important consideration:

How long do you expect to remain in the home?

The longer either arrangement remains outstanding, the more important its long-term cost structure becomes.

With the reverse second, additional time allows more interest to accumulate.

With the HEI, additional time gives the property's value more opportunity to change.

What About Your Children and Future Inheritance?

This can be an uncomfortable subject, but it is an important one.

Adult children sometimes become concerned when parents consider accessing home equity because they worry that doing so could reduce a future inheritance.

That's understandable.

But looking only at the home's equity today doesn't tell the entire story.

No one knows exactly what the property will be worth 5, 10 or 15 years from now.

And both an HEI and a reverse second can affect the amount of equity ultimately remaining in the property — just in very different ways.

With the reverse second, the loan balance can increase over time because of deferred interest.

With the HEI, the amount ultimately due can increase because of changes in the home's value and the terms of the agreement.

So instead of asking:

“How much equity is in Mom and Dad's house today?”

A better question may be:

“How could each option affect their financial situation today and the equity remaining in their home years from now?”

There is another way to think about inheritance as well.

An inheritance doesn't necessarily have to mean waiting until someone passes away.

Some parents may prefer to use a portion of their home equity to create a living legacy — helping their children today while they're able to see the benefit themselves.

For example, helping an adult child purchase a home today could potentially have an impact on that child's financial future long before an eventual inheritance would be received.

That doesn't mean parents should compromise their own financial security to help their children.

But for homeowners who are financially comfortable and place a high priority on helping their family, it can be part of the conversation.

After all, the equity belongs to the homeowner.

Preserving an inheritance may be important, but so may having enough money today for home improvements, unexpected expenses, financial flexibility or helping the people they care about.

This May Be a Good Family Conversation

For homeowners who consider leaving their home or its equity to children or other heirs an important goal, discussing these options together may be worthwhile.

The objective doesn't have to be choosing the option that leaves the largest possible inheritance.

It should be understanding the tradeoffs.

How much money does the homeowner need today?

How long does the homeowner expect to remain in the property?

How important is avoiding another monthly payment?

What happens if the home appreciates substantially?

What happens if it doesn't?

Could using some of the equity today accomplish something important for the homeowner or the family?

And how could each choice affect the homeowner's future equity?

Those are much better questions than simply asking:

“Which program gives me the most money?”

Don't Forget: There May Be Other Options

Neither an HEI nor a reverse second mortgage will be the right answer for every homeowner.

Depending upon the homeowner's circumstances, other possibilities may include a traditional HELOC, fixed-rate home equity loan or another second-mortgage program.

Those alternatives generally involve monthly payments, but they may ultimately be less expensive depending on how much money is needed, how quickly it will be repaid, and the homeowner's qualifications.

Sometimes accessing home equity may not make sense at all.

That's why comparing the available options matters.

Keep Your First Mortgage. Understand What Happens to Your Equity.

Homeowners who have spent years building equity may have more choices than they realize.

If you have a first mortgage you're happy with, accessing equity doesn't necessarily mean you have to refinance it.

And if adding another required monthly mortgage payment isn't appealing, there may be alternatives to a traditional HELOC or home equity loan.

An HEI and a reverse second mortgage approach the problem very differently.

One exchanges a financial interest tied to the home's future value for money today.

The other lends money today and allows the interest to be deferred, causing the balance to grow over time if payments aren't made.

Neither is automatically better.

The important thing is understanding what you're receiving today — and what you may be giving up tomorrow.

Before making a decision, compare the options based on your home, your existing mortgage, your equity, your goals and how long you expect to remain in the property.

For a no-obligation review of your home equity options, contact:

Rob Clark | Home Loan Consultant
Firestone Financial Group
📱 209-227-7745
📱 559-476-9279
✉️ rbrtclark53@gmail.com
🌐 robertclarkloans.com

NMLS #357788 | Firestone Financial Group NMLS #301522
CA DRE #01148307 | Equal Housing Lender

Disclosure

This article is provided for general educational and informational purposes only and is not intended as legal, tax, investment, estate-planning, or financial advice. Home Equity Investments, Home Equity Agreements, and Shared Equity Agreements are not traditional loans, and their terms, costs, settlement provisions, property requirements, eligibility requirements, and treatment of future home value vary by provider and program. Reverse second mortgages are loans, and interest accrues on outstanding balances. Program availability, qualifications, costs, loan amounts, interest rates, property requirements, age requirements, repayment provisions, and other terms are subject to change. Homeowners remain responsible for their existing mortgage and applicable property obligations. Accessing home equity may reduce the equity ultimately available to the homeowner or the homeowner's estate. Home values may increase or decrease, and future appreciation is not guaranteed. Consult appropriate financial, tax, legal and/or estate-planning professionals regarding your individual circumstances before making financial decisions.