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California-based Point is a new company allowing homeowners to sell home equity to investors for cash.
CNBC reports that the financial technology is positioning itself as an alternative to home equity loans, which can result in increased debt, and block out large groups of homeowners with low credit scores. It also comes as rising home prices are giving homeowners a boost in equity.
Here’s how it works: Let’s say the home is appraised at $1 million. It has a $500,000 mortgage on it, so there is $500,000 in equity. The homeowner needs $100,000 in cash, so they enter into a contract with Point, which looks at the local market, the borrower and the home and evaluates the risk on the deal. Point then lowers the value of the home by, let’s say 15% in order to cushion the risk that the home’s value might fall or that the borrower might not be able to pay them back. That puts the home’s value at $850,000.
The homeowner has up to 10 years to end the contract and pay off the contract to the investor. Point does charge a 3 percent fee upfront. In addition, when the contract is ended, the investor — Kingsbridge for example — gets the $100,000 back plus a percentage of the home’s appreciation over the term of the contract, let’s say 30% in this case. Since it has already devalued the house in the contract, even if the home doesn’t appreciate at all, the investor is still getting $45,000 over and above its investment. If the home falls in value, the investor takes a hit.
