Unison Homeowner Equity Access is Probably a Terrible Idea!

While researching different ways to access home equity for my last post on hacking your mortgage into a high interest savings account, I came across an interesting company I hadn’t heard of before.  This company, Unison, offers a way to access the cash tied up in your home equity without any interest charges or monthly payments!  Sounds great at first glance, but of course there is a catch to go along with it.  That catch is that they are effectively “investing” in a portion of your home and will take a share of any appreciation or depreciation when you eventually sell (or at the end of 30 years if you still live there).

This seems like a pretty fair trade at first because you’re getting access to a large amount of cash without immediately paying anything for it (aside from opening fees), but it’s important to take a look at the fine print and calculate how much this eventual appreciation might amount to.  I’ll crunch a few possible scenarios below and you can decide for yourself whether a Unison Homeowner equity loan is something worth thinking about.

How the Unison Homeowner Equity Loan Works

I won’t cover every single detail of how the Unison Homeowner program works, but here’s the details I deemed important:

  1. Unison will give you a cash amount worth between 5 and 17.5% of your home’s value, so long as that amount doesn’t put you at more than an 80% LTV ratio against the home.
  2. There will be no monthly payments or interest charges on the loan.
  3. When you decide to sell your home, Unison will share in the appreciation or depreciation of the house as well as take their initial loan amount out of the sale price.
  4. Unison’s share of the change in value is equal to 4 times the initial loan amount.  For example, a loan of 10% of the home’s value would mean Unison gets 40% of the change in price.
  5. If your house sells for more than it was appraised for at the time of the loan, Unison will take the initial loan amount plus their share of the price increase.
  6. If your house sells for less than it was appraised for at the time of the loan, Unison will take the initial loan amount minus their share of the price decrease.

Those are the basics laid out front and center on the Unison Homeowner’s webpage, but there are few additional items to keep in mind:

  1. There will be an immediate 3.9% transaction fee on the amount loaned.
  2. If you decide to sell your home within 3 years, Unison will not share in any depreciation and other special provisions apply.
  3. After 3 years, it is possible to buy Unison out of the deal by paying back the loan plus change in home value as determined by an appraisal.
  4. Home Improvements made on the home can bring up the “cost-basis” of the home as determined by an appraisal.
  5. If you do not maintain the property, Unison may take a “Deferred Maintenance Adjustment” to make up the difference as determined by an appraisal.
  6. If you don’t sell the house within 30 years of taking the loan, Unison will take their loan back and their share of the property value change as determined by an appraisal.
  7. Unison cannot be used with rental properties, you will need to buy Unison out first if you want to convert your current home to a rental.

It definitely starts to get complicated if you consider all possible outcomes of your future home, so let’s stick to a possible standard use of the loan.

How Much Is The Share of Appreciation Really Worth?

The main selling point on this particular type of loan is the lack of traditional interest and monthly payments.  While that probably sounds great to a lot of people trying to access money from their home, my first instinct is to try figuring out where they are getting their money from.  Hopefully that’s your first thought as well when you think about getting into a deal that looks great on the surface.

Setting aside the 2.5% upfront fee and additional closing costs, the primary way Unison is making their money is on home values appreciating over time.  What isn’t clear until you run the numbers is how much that’s actually worth.

Of course we can’t predict the future of home values, but we can look at the historical average and see where that falls to at least get a starting point.

Based on data from the Federal Housing Finance Agency’s Housing Price Index, we can look at average home value changes over time.  Here’s a description of the index if you’re curious:

“The HPI is a broad measure of the movement of single-family house prices. The HPI is a weighted, repeat-sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties. This information is obtained by reviewing repeat mortgage transactions on single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac since January 1975.

The HPI serves as a timely, accurate indicator of house price trends at various geographic levels. Because of the breadth of the sample, it provides more information than is available in other house price indexes. It also provides housing economists with an improved analytical tool that is useful for estimating changes in the rates of mortgage defaults, prepayments and housing affordability in specific geographic areas.”

As you may already know, housing prices and their changes vary wildly depending on where you live.  Despite the obvious downside of using a broad average of the US, it should do for our example calculation here.

First, I pulled down the data from this link that summarizes the index for each of the 9 regions as well as the overall USA.  Then I applied a simple CAGR formula to the start and end values of 1980 to 2017 to get an average annual growth rate of 3.73%.

Now we have to use that average growth rate to figure out how much effective interest we’re paying on this “interest-free” loan.  Let’s use an example where you pulled 10% of your equity out of your house in cash in exchange for giving Unison a 40% share in the appreciation.  That means Unison would be entitled to 40% of the average 3.73% growth each year or 1.49% of your total home’s value annually.  As the loan was for 10% of the home’s value and Unison will make an average of 1.49% of the home’s value each year, that makes the effective interest rate 15%!

As the ratio of loan to share of appreciation is 4:1, the actual amount taken out (between 5 and 17.5%) doesn’t change the effective interest rate.

15% is a huge interest rate compared to the other options available for accessing home equity!

Other Options for Accessing Home Equity

While the “no interest, no monthly payments” loan might sound appealing, there are much cheaper ways to access that money in the long run such as:

  1. Cash-out Refinance
  2. Home Equity Loan
  3. Home Equity Line of Credit

In fact, the effective interest rate is so high, it would probably make more sense to just get a personal loan from a bank, credit union, or one of the fancy peer to peer networks!

The Breakeven Point of a Home Equity Loan vs. Unison Homeowner

While the 15% I calculated above is huge, it was based on a broad average that won’t apply to everyone.  Maybe you live in a specific part of the US in which you think property values are pretty stale and can’t even keep up with inflation.  Let’s calculate how little the appreciation has to be for this type of loan to be comparable to a more traditional Home Equity Loan.

First, we need to start with the interest rate of the Home Equity Loan.  While it will vary by bank (+ credit score and other factors), a little bit of personal research revealed that it wouldn’t be difficult to lock in a fixed interest rate 1 or 2 points above the prime rate (4% as of writing) for a traditional Home Equity Loan.  With a little bit of effort, you might even be able to find something lower, but we’ll take the conservative estimate on the higher end of what I found: 6% fixed.

Now we just have to reverse engineer the equation we used above to get the yearly property appreciation that would give us an effective interest rate of 6%.  This number comes out to 1.5%.

So if your best option for getting home equity out with a traditional loan or refinance comes out to 6% AND you expect your home to appreciate less than 1.5% each year (less than inflation in most years), a Unison Homeowner loan could be right for you.  Just don’t forget about the fees to get the loan started and the additional constraints you have regarding your home going forward.

When a Unison Homeowner Loan Might Make Sense

Given the very high effective interest rate on the average appreciation case, a Unison equity loan probably won’t make sense for most, but here are a few situations I think it might.

  1. If you are very confident that your house’s value is moving sideways or down, and that means not even keeping up with inflation (and Unison thinks the opposite).
  2. If you want to bet against the value of your home going up (while still maintaining a perfect maintenance record).
  3. If you can’t get approved for traditional equity access or a personal loan, but still need access to cash (seems unlikely).

Personally, I can’t come up with anything else.  Can you think of a situation where this type of loan would make sense for the average person as opposed to the alternatives?

Why It Definitely Doesn’t Make Sense For Us

We bought a townhouse in Seattle a few years ago and the market has been on fire since then.  Based on what we paid 3 years ago and our current Zillow estimate, the annual rate of growth on our property has been over 15%!  I obviously don’t expect this to keep up forever, but I also don’t see it slowing down in the near future.  There are a lot of people moving into Seattle and the rate that new housing is being built hasn’t been able to catch up yet.

If we assumed an average of 15% growth over the next 3+ years, we could end up paying an effective interest rate of over 60% on this type of loan!!!  It’d be cheaper to just max out the cash advance limits on all of our credit cards if we were really strapped for cash!

Luckily, we’re not in the market for any kind of loan at the moment, so this has purely been a thought exercise.

If there’s any lesson here, it’s to not be fooled by any flashy advertising, always read the fine print, and be sure to always consider comparable options that may be cheaper.

Thanks for reading and hopefully someone thinking about a Unison Homeowner equity loan stumbles upon this post before pulling the trigger.  Depending on where you live, it could end up being the most expensive loan you’ve ever taken!


142 thoughts on “Unison Homeowner Equity Access is Probably a Terrible Idea!

  1. After reading your article, there is one scenario that is not addressed. My daughter wants to buy her first condo. We would be giving her half of the down payment. Our financial advisor says this will be more of a gift than any investment benefit for us. Thus, we thought she should use this service so it does not tie up our funds and they can stay in our investment portfolio. It seems like a good option for her rather than paying rent and receiving no equity on any property. By the time she sells, she hopefully will be more established in her career and she will still get some profit so that she can finance a next home the traditional way. Thoughts?

    1. Hi Sherry, it looks like you’re deciding between several different things at the same time.

      1. Should your daughter buy a house at all?
      – You mention “It seems like a good option for her rather than paying rent and receiving no equity on any property”. This is not the proper way to evaluate renting versus buying and the correct answer highly depends on the local market she is looking to buy in. Renting can be the financially smarter move in some cases, especially if you don’t have a full down payment. On the other hand, buying even with PMI can also make sense in the right market, it’s very location dependent. Here is a powerful tool from the NYT that can help make this decision more clear:
      https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

      2. If it makes sense for her to buy a house, should you gift your daughter half of a down payment?
      – This is completely a personal decision, but as you’ve been advised, it has to be a gift in most cases for her to still qualify for a mortgage. This means it no longer belongs to your investments, but it will help your daughter out significantly in the long run because she’ll avoid PMI and/or sharing any appreciation on the property.

      3. If it makes sense to buy a house, and you choose not to gift her half of the down payment, should your daughter take out a Unison loan?
      – If she is buying in a market that is likely to appreciate in the coming years, then taking out a Unison loan can be very expensive. (If she is not buying in a market that is expected to appreciate, I would re-evaluate the rent versus buy decision again.) As I calculated above, just having average appreciation on a home means the Unison loan works out to an effective 15% interest rate every single year. This is extremely expensive compared to most alternative ways of funding a home, including putting down 10% or less and paying PMI.

      The biggest decision you need to make is whether or not to gift the money. I doubt you plan to get ~15%/year return on your investments, so the money would be better used towards the down payment. This is IF it makes sense to buy at all, and IF you are okay giving those returns to your daughter instead of keeping them for yourselves.

      The short answer is No, this scenario does not make a Unison loan make sense.

  2. I suspected that this home equity plan by Unison was a bad idea when I received a mail advertisement about this a few weeks ago. This fits under the old adage”If it sounds too good to be true, it mostly likely is”. Unless one lives in an area with extremely low housing demand, most likely their house will appreciate in value well beyond 1.5%. It is subtle because the money does not directly come out of one’s pocket, but they are indirectly gaining a huge amount of interest based on the appreciation of the house’s value.

  3. I am an older adult and I may not be alive in 30 years. I am trying to increase my quality of life now. I am still contemplating on doing this.

      1. My home value is at about $550,000 and I owe $289,000. I’ve been told that the loan is too high to qualify for a reverse mortgage. I am 69 and still working. My credit is at 798. Through unforeseen circumstances, I either have to keep working, sell my house and move or have an influx of cash somewhere. I was considering this Unison option.

    1. “If you decide to sell your home within 3 years, Unison will not share in any depreciation and other special provisions apply.”
      If your home loses value, you will still owe Unison the full loan amount.
      After 3 years and you take a loss when selling your home, Unison will take a loss as well, but will still take the 10% or so of the final sale price.

  4. Yeah, that’s what I was thinking. If I do not expect to be alive in 30 years and I could use the cash to pay… I don’t know, my kids’ student loans… I get it, they are not going to be as much off my house as otherwise but, on the other hand, paying back student loans is always a beach, so to speak.
    So, at this point, my only question is: how legitimate are these people? And what is going to happen if they go out of business?

  5. Noah, great thread but SOOO confusing. My husband and I did an application with Unison in March 2018 but backed out. We spent $ 2000.00 to have an excellent tax/real estate lawyer review their contract (78 pgs) and he basically said that as along as we understood the numbers we could proceed. Nothing shady. However, what we discovered in the process is that although they use “independent 3rd party” appraisers, our house appraised at over $ 100,000 below it’s current value. THIS IS THEIR GAME! We fussed with them about this and they actually returned out $ 2000.00 legal fee which was very generous but they said there would be not negotiating the INITIAL Assessed value because their investors did not want to….that’s pretty much a quote. We live in Brooklyn NY. I bought my house for $ 212,000 and it is now worth $ 2,500,000. Unison is only interested in certain zip codes where housing prices do not fall into ‘normal’ predictions..ie, SF, Chicago, NYC…for example.

    We felt that Unison was an option because at 62 we are underemployed (unexpectactly) and it seems that no one is hiring us…though we seek employment everyday. Agism is real! We have made an incredible amount of money on our house in the 25 yrs we have lived here which would not be touched by Union. They are only interested in future appreciation. Thirdly, having this money would mean we could stay in our home for another 5 years which is the plan. We have looked into Reverse Mortages and told by our financial advisor to not do them. We do not qualify for any home equity loans at any interest rate because they want to see income. To downsize in NY would actually be more expensive even for a simple apartment which averages $ 2000/ month. And to downsize to the boondocks feels very sad and isolating. Yes, Unison is expensive but some of us have go no other choice but to sell and move far away . My family is in this area. The whole thing is just plain sad that at our age we cannot get work. After backing out of the application we are actually now at a point where we may re engage Unison…try as we have there are simply no other options but downsize upstate somewhere away from what we love.

    1. I was interested in this option and am a 76 year old woman with a Finance degree so I started the process. I was looking for the catch and figured the appraisal would probably be the most likely culprit. This would be especially important because my loan would not be a “30 year” plan.
      Sure enough, the appraisal came in $32000 below city assessment and $26000 less than an appraisal I had done when I applied for a home equity line of credit two years ago (before installing a $15000 new roof). They offered to do a second appraisal and average the two, but if I still turned down their offer I’d have to pay for half of the appraisal. I may be 76 years old but I’m not senile. Beware!!!

  6. Angela. It seems a HELOC is your best option with a10 year, interest only drawal period. And, you would have access to a lot more cash. (Probably enough to pay the interest payments)

  7. Thanks for the explanation and number crunching Noah, this helped me make sense of this new type of loan. I don’t think I will be pursuing it, so thanks again for the research.

  8. I was considering Unison and my research on their site shows the 4:1 equity take from them. Too Much!! Though for some people in a complicated situation it may be worth it to them. However, I also ran across a company call Point – they offer a similar program but cap their take depending on how long you take to repay the loan. For some of you above thinking you are willing to take the plunge in spite of the cost with Unison, please check out the Point program at https://point.com/calculator. Hope that helps someone.

  9. What about for the purpose of paying off “high” interest student loans (5.5-7%), and then putting the cash that would have gone to those loans
    & interest in high-yield savings/ investments?

    1. As I broke-down above, a Unison loan has an effective interest rate over 14% in an average housing market! That’s an extremely high interest loan, especially compared to your student loans, so a Unison loan would most likely not make sense in your case.

      Borrowing money at ~14% interest to pay off a loan at ~7% interest is never a smart decision.

      1. I’m still not convinced that it is ALWAYS a bad idea. There is a difference in total cost between the compound interest of a student loan and the “one time interest” of the Unison investment recovery. It is risky, but under certain circumstances, one would end up paying out more in student loan interest than one would pay Unison when selling a home.

        Assumptions:
        1) House is sold 5+ years from payout date
        2) Payout is used to pay off student loans that cannot/will not be paid off early
        3) Majority of money that once went to student loans in put in high-yield savings/investments for future down payment and/or back into home equity…aka recouping payout
        4) Unison does not undervalue the home at time of payout (a known issue)
        5) Home value does not skyrocket

        For example, with the student loan debt in my family, we would be paying approximately $22,000 in interest in the life left.

        Assuming a high 3% value increase in our home in the five years, that would max around $25,000 value increase. Unison takes 40%, of that $25k, so about $10,000.

        $10,000 to Unison versus $22,000 … $12,000 – transaction fees = approx $10,000 in savings.

        Is there anything missing in my logic? Let me know!

        1. The effective annual interest rate I calculated (~14%) is compound, not “one-time” as you mention. Even though you aren’t making payments along the way, the amount you end up owing at the end is growing in a compound fashion every year. If you hold the loan for 5 years with average home value growth, the “one-time” interest would be about 93% of the initial loan amount.

          Also, the average growth of homes in the US is 3.73% per year, so your 3% estimate is low unless you know your local market better.

          I can’t check your math because you didn’t include your home value or expected loan amount, but the 3% number (annual growth or after 5 years?) along with the $25k seems off for a loan amount that would save you $22k in interest. If you can provide your home value and how much you expect to pull out, I can take another look.

  10. Hi Noah,

    I recently got one of those Unison flyers the other day and although I don’t need a loan right now, I thought I might take the money and invest it, but I’m struggling with your effective interest rate calculation of 14%. When I run some numbers on theoretical situation I come up with about a 6.8% rate which is still high, but much more reasonable and competitive with other options. If you borrowed $100,000 against a $700,000 home (current value), and sell it 25 yrs later in 2043 for $1,750,000 (3.73% appreciation rate) you’d owe them 40% of the $1,050,000 appreciation, or $420,000 plus the original $100,000 for a total of $520,000. $100,000 invested at 6.8% would be worth $520,000 in 25 yrs. What am I missing here?

    Mike

    1. Hi Mike,

      The first mistake I notice in your calculation is the % share that Unison owns. If you are pulling $100k out of a home worth $700k (14.2% of the home’s value), then you will owe ~57% of the appreciation at the end of the deal (4 x 14.2%). The 40% ownership value I used above is only applicable if you take 10% of your home’s value out.

      Beyond that, you did stumble into something that I didn’t dive into within the post, but the effective interest rate does shrink a bit if you hold the loan for a long time. While the 14.9% I calculated is correct for the first year, it shrinks slightly for each additional year that you hold the loan.

      Using your same numbers, but with the correct Unison appreciation value, the final amount owed back to Unison equals ~$700k ($600k appreciation + $100k loan amount). After 25 years, we have to look at both possibilities to get the correct effective rate.
      If you didn’t take the Unison loan at all, you get to bank the full $1.05 million in appreciation.
      If you did take the Unison loan, then you get to bank your share of the appreciation ($450k) plus the difference of your investment ($100k compounded over 25 years) and the initial loan amount ($100k).

      Equation (x=growth rate):
      $1,050,000 = $450,000 + ($100,000 * (1+x)^25) – $100,000
      x in this case equals 8%
      (http://m.wolframalpha.com/input/?i=1050000+%3D+450000+%2B+%28100000+*+%281%2Bx%29%5E25%29+-+100000)

      For the plan of pulling out money from your home using Unison and investing it, you would need to get a ~8% return on that investment just to break even with doing nothing.

      Keep in mind this still doesn’t take into account the upfront fee that Unison charges (3.9%), so you would need your investments to grow closer to 8.5% in that case to break even. Not quite the 14.9% I calculated above over the long term, but still much higher than most home equity alternatives if you live in an average housing market AND know you won’t move for a at least couple decades.

  11. I agree, I’m at the age and I have the equity where I’ll still leave more to my kids/family than my parents left me. I’ll be able to improve the home and have money left over for other things right up until I take retirement. I am going to start discussions.

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