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:
- 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.
- There will be no monthly payments or interest charges on the loan.
- 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.
- 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.
- 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.
- 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:
- There will be an immediate 3.9% transaction fee on the amount loaned.
- If you decide to sell your home within 3 years, Unison will not share in any depreciation and other special provisions apply.
- 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.
- Home Improvements made on the home can bring up the “cost-basis” of the home as determined by an appraisal.
- If you do not maintain the property, Unison may take a “Deferred Maintenance Adjustment” to make up the difference as determined by an appraisal.
- 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.
- 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:
- Cash-out Refinance
- Home Equity Loan
- 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.
- 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).
- If you want to bet against the value of your home going up (while still maintaining a perfect maintenance record).
- 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!