According to the Wall Street Journal, a new type of home  financing has come to town. And you don’t need equity to get it. It works this way: An investment company advances you funds–10 to 15% of the current value of your house. You make no payments. You have use of the money until you sell your home. Then, the finance company gets half of your equity. Some of them require that you pay back the funds you were advanced, others do not.

All of them require that you maintain and pay your taxes on the property, and that you don’t sell for a minimum number of years without paying a stiff penalty. In addition, you cannot refinance or take on additional home equity debt without their approval. However, if your home doesn’t increase in value you are not penalized and in some cases won’t even have to pay the loan back!

So, if you desperately need money and have no equity, this loan could be a life saver. Otherwise, it could be a very expensive way to borrow. Consider the following scenario:

You have a $500,000 home, and borrow $50,000 with an appreciation exchange loan. In ten years, your home is worth $750,000 (at less than 5% appreciation this is not an unbelievable picture). Well, you sell the home and have to repay the $50,000–and an additional $125,000, for a total of $175,000 to borrow $50,000 for ten years. If you invested that $50,000, you’d have to earn a return of nearly 13% to break even! Most people would consider 13% pretty expensive for mortgage financing. But it’s less than most credit card loans, many private student loans or small business loans.

 And it makes home value depreciation almost a good thing….

Tags: appreciation exchange mortgage, home loan with no equity, no equity home loan, reverse mortgage

This entry was posted on Monday, October 6th, 2008 at 4:27 pm and is filed under Daily Pick. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.