The kind of financial product you can utilize to help pay for healthcare depends not only on how much home equity (or other assets) you have, but also on what kind of care you need. If the care is likely to be long-term and you don’t have enough cash to cover those expenses, a reverse mortgage might work best.
But what if you have an accident or an illness that requires rehabilitation or temporary in-home care that isn’t covered by your health insurance? Or, after a planned surgery, only a couple of weeks of in-home care are covered when what you will actually need could be several months? That’s when something like a home equity line of credit or a home equity investment might be the best option. In this article, we’ll cover what a home equity investment is, how one works, and when such an arrangement makes sense.
Also known as a home equity agreement or equity sharing agreement, a home equity investment provides a lump sum of cash upfront in exchange for a share in the ownership of your home. With a home equity investment, you are, in essence, selling part ownership of your home to an investor, with the option to buy that share back at the end of the agreement term by paying the company the current market value of their share in the home. Often there is little or no penalty for prepaying to buy back the equity before the end of the agreement. During the term of the agreement, the investment company owns a share of the property but does not have occupancy or leasing rights. (They cannot evict or otherwise displace the homeowners.)
When to consider a home equity investment
Let’s look at an example in which a home equity agreement is a good option. Bob, a 61-year-old retired police officer lives with his wife in his dream retirement home in Miami, Florida. Recently, he was doing some work on his roof and suddenly felt dizzy. That dizzy spell resulted in a bad fall, ending in four broken ribs and a broken wrist. Fortunately, Bob will make a full recovery, but it won’t be quick. Bob will need full-time care and in-home physical therapy for the next four months, something that his health insurance through the police department will not cover. Even though Bob lives with a spouse, she is not trained nor can she physically lift his weight to visit the restroom, therefore requiring around-the-clock care.The cost of the care and the physical therapy will come to about $75,000. That’s a lot of cash to come up with over four months. How can Bob cover the cost of the care he needs?
First, we have to understand what financial resources Bob has. He and his wife, Joanne, have a high income, but they also have significant monthly expenses. Five years ago, they bought their dream home in Miami for $1.2 million; it’s currently worth over $2 million. Both Bob and Joanne receive ample income from their Social Security and retirement funds. Bob brings in about $5,000/month and Joanne, a 67-year-old retired pilot, brings in another $3,500, for a total income of $8,500/month. However, that dream home costs over $5,000/month, with the mortgage, taxes, and insurance. Bob and Joanne also both drive premium cars and the couple takes at least two extended vacations per month. Although this leaves them with very little cash at the end of each month, they are both loving their retirement.
While they don’t have leftover monthly income, Bob and Joanne do have about $50,000 in savings they can tap into and some credit cards they could use to pay for the remaining $25,000. Understandably, they’re not too keen on wiping out their savings nor on racking up $25,000 in credit card debt.
So, what are their options to fund Bob’s healthcare? Since they have so much equity in their home, they consider options that take advantage of this, starting with a reverse mortgage. However, since Bob is not over 62, they cannot qualify for a reverse mortgage. The couple also look into getting a HELOC (home equity line of credit) but soon realize that they wouldn’t qualify for a line of credit either. They have so many expenses and not enough cash left over each month to cover the monthly payment for a HELOC.
Finally, Bob and Joanne consider a home equity agreement. They shop around and discover that they can obtain a home equity investment that would net them a lump sum of $50,000 in exchange for 6% of their home's value.
How does a home equity investment work?
Will they qualify? Yes! Investment companies that offer home equity agreements generally require that owners have at least 25% equity in their home (at current market value), and that they continue paying property taxes and maintaining the condition of the home, covering the cost of any repairs. Home equity investors also usually require borrowers to retain at least 20% of the equity in the home post-investment.
Bob and Joanne are relieved to learn that there are no monthly payments, and the investment company does not charge interest—a home equity investment is not debt, so it won’t affect their standard of living by reducing their monthly income. Rather, the investor will share in the increased (or decreased) value of their home when it is sold, refinanced, or when they or their heirs buy out the investor’s share at the end of the investment term, which is anywhere from 10 to 30 years.
Bob and Joanne won’t have to worry about payments until the end of the investment term, at which time they can pay the 6% of the home’s value to buy back the investment company’s share of their home. Or, they can choose to sell the home and pay the investor from the proceeds. Assuming their Miami dream home has appreciated in value, the couple will owe 6% of the home’s appreciated value.
Since Bob and Joanne have a significant amount of equity in their home, they could also choose to take a larger investment than the $50,000 they currently need for Bob’s rehabilitation. The couple know that large expenses can pop up unexpectedly, so adding to their savings account while they have the opportunity could be a smart choice. For 12% of their home’s equity, they could take a $100,000 investment to ensure any unforeseen costs or a longer period requiring care will be covered.
What if you don’t have a $2 million dream home? A home equity investment might still work. Let’s say you own a home worth $500,000 with $350,000 in equity. As long as your current income (Social Security payments, retirement income, etc.) is sufficient to cover your mortgage and other monthly expenses, you would qualify for up to $133,000 in exchange for 55% of your equity. As with Bob and Joanne’s home equity investment, you’d be responsible for paying that percentage of the home’s worth when the investment term ends, either by selling the house or paying the investment company 55% of the home’s value.
What else you need to know about home equity investments
Home equity investments allow you to retain ownership of your home while continuing to build some wealth through any increase in the home’s market value. But it’s important to understand the terms of any financial product you’re considering. Here are some things to keep in mind about home equity investments.
While this financial product can work well for short-term needs, it will only provide access to a small portion of your home’s equity, usually up to 20% - 25% of its total market value. And keep in mind that, while there is no debt obligation for heirs, if you are hoping to leave the home to someone, the company’s share in the property must be paid back when the agreement term ends. You or your heirs will owe what the investment company’s share is worth—likely significantly more than the money you got in exchange at the beginning of the agreement, if the home has appreciated in value.
There are fewer requirements to qualify for a home equity investment, but the investment company may conduct a credit check to ensure your score is 600 or higher and your home must be reasonably maintained, in good condition.
While we have tried to simplify the math in order to help differentiate financial products, determining which product is the right fit for your finances and your healthcare needs is a complex process. If you or a loved one needs additional funds for in-home care or other health needs, a Wellahead concierge can talk you through the options available to you. There’s no fee and no obligation. We are here to help!