Traditionally, using your home equity to get cash meant taking out a loan or credit line. Although useful, these debt products involve monthly payments towards the loan’s principal and interest.
But a new option has emerged, with a handful of companies investing in home equity rather than lending on it. This allows homeowners to leverage their equity for cash without adding another monthly payment.
One such company is Hometap, which will give you funds upfront for a cut of your home’s future value.
Read our full Hometap review below to see if it’s a wise financial decision for you.
Hometap gives you cash upfront for a share of your home's value after 10 years. In some cases, this can save you money compared to a home equity line of credit. And if your home declines in value, you can even end up with a net gain. In other cases, however, it can be significantly more expensive than alternative options, so it's important to carefully consider and understand the potential costs.
- No monthly payment.
- Fast and easy application process.
- Getting an offer doesn't affect your credit.
- Cost can be high if your home's value appreciates significantly.
- There's a forced sale risk if you're unable to pay Hometap after 10 years.
Hometap Basics: How it Works
Hometap lets you tap into your home equity for cash without taking on a monthly loan payment.
To do this, the company invests an agreed-upon amount in your home in exchange for that proportion of its future value.
This is not a home equity loan. When you sell your home, you pay this percentage of the sale price back to Hometap.
Think of it as though your home is a stock in which Hometap invests.
Imagine you have a $100,000 home and strike a deal with Hometap to secure $15,000 in upfront funds. Then, 10 years later, you sell that home.
Below are three potential outcomes of that situation based on various hypothetical housing markets:
|Future Home Value||Hometap Share Amount|
|3% annual appreciation:||$134,392||$33,598|
|5% annual appreciation:||$162,889||$40,722|
|10% total depreciation:||$90,000||$18,750|
Hometap investments have maximum terms of 10 years. If you don’t sell your home within that time frame, you’ll pay back the initial investment (based on your home’s appraised value 10 years from the date of the investment) through another source of funds, such as your savings or a home equity loan.
Hometap Interest Rates
There are no interest payments or monthly fees with Hometap. As such, you don’t need to concern yourself with interest rates, as you would with a standard HELOC.
However, it should go without saying that Hometap is not a free service.
As noted in the previous section, you agree to pay Hometap a portion of your home’s future value. So when calculating the costs of this arrangement, you have to think about how much you’ll owe relative to the amount you received, not the total proceeds.
Continuing our previous example, let’s say your home is worth $100,000 today and you use Hometap to secure $15,000 in upfront funding.
If your home appreciated by 3% a year for 10 years, its total value would be $134,392. In that case, you’d owe Hometap $33,598 (based on their on-site calculator).
While you don’t pay interest to Hometap, we can calculate the equivalent annual interest rate on a $15,000 loan that amounts to $33,598 paid back in 10 years:
|Equivalent Interest Rate|
|3% annual appreciation:||8.40%|
|5% annual appreciation:||10.50%|
|10% total depreciation:||2.26%|
Hometap Costs and Fees
In addition to costs outlined above, there are a few fees to be aware of.
For one, Hometap charges 3% of your investment amount — taken out of your initial proceeds — as a closing fee.
Note: we included this 3% figure in our calculations above.
You also have to factor in the following fees (which are not included in our example, as the specific numbers can vary):
- Home appraisal: $300 to $450, on average.
- Title charge: about $700 to $800, on average.
- Government filing: about $350 to $1,000, on average.
Hometap vs. Home Equity Line
Let’s go back to our $100,000 home example. But this time, let’s say we got a home equity loan for $15,000 with a 7% fixed interest rate.
Here’s how that breaks down:
- Initial home value: $100,000
- Loan amount: $15,000
- Loan interest rate (based on Hometap’s estimate): 7%
- Monthly payment: $174
- Total paid at the end of 10-year term: $20,900
As you can see, assuming the home appreciates in value, a home equity loan is the less expensive choice. Of course, this assumes you can qualify for a home equity loan and make the required monthly payments.
Many homeowners who are interested in home equity sharing cannot qualify for such a loan and would otherwise turn to credit cards (or other loan alternatives), where interest rates can be well above 10%.
What About Renovations?
Hometap doesn’t share in any home value changes directly attributable to renovations.
That means if your home value increases by $25,000 or more due to renovations, you can request that Hometap give you a renovation adjustment to exclude that figure from their settlement calculation.
To do this, you’ll need to get a new property appraisal. You’ll also need to hold onto receipts associated with (and photographs of) the renovations.
Let’s look at an example…
Say you have the same $100,000 house from our earlier calculations, and you get $15,000 from Hometap. Your home appreciates to $162,889 due to market forces over 10 years. However, you also renovate your kitchen, which adds another $30,000 to your home’s value. The market value of your home now sits at $192,889.
You would then request a renovation adjustment from Hometap at the time of settlement, provide the necessary evidence, and get your property appraised.
Your $30,000 renovation appreciation would be excluded from the final calculation, so Hometap’s share is based on $162,889, not $192,889.
Note that if your renovations do not result in at least $25,000 in additional value, they will not be excluded from the agreement.
Application Process and Eligibility
The process for getting cash from Hometap is fairly straightforward.
First, you request an estimate to see if you pre-qualify. They’ll ask for some information about you and your property. This part takes a minute at most.
Hometap will then prepare an investment estimate using your information. You’ll also gain access to a dedicated investment manager to help you along.
If you like the terms Hometap provides, you’ll fill out a short online application. After that, Hometap orders an appraisal of your home and uses the appraised value to put together your final offer.
Accept the offer, schedule the closing, close on the deal, and Hometap wires your funds to your bank account within a few days.
To qualify, you must own a single-family home or a condominium in a state Hometap operates in.
Hometap is available in the following states as of August 29, 2022:
- New Jersey
- New York
- North Carolina
- South Carolina
- Washington (State)
Hometap doesn’t have hard requirements for credit score or equity because they evaluate each property independently. However, most of their applicants have scores of at least 600 and hold 25% or more equity in their property. Shoot for those numbers to get better offers.
How Much Cash You Can Get
Hometap lets you borrow up to 30% of your home’s value, with a maximum dollar figure of $600,000.
The percentage of your home’s value you will receive depends on your credit score and current equity in the property.
To determine your home’s value, Hometap sends a third-party appraisal company to your home. Upon settling the investment, Hometap sends another appraiser to determine the final value.
By using third-party appraisers both times, Hometap minimizes the potential conflict of interest of under-appraising the property to claim more appreciation.
Hometap Pros and Cons
Let’s look at the highlights and drawbacks of Hometap.
- No monthly payment. You receive cash without constricting your budget.
- Downside protection. If your home has depreciated when you settle your investment, you may come out far ahead of what a traditional HELOC would cost you.
- Fast process. The application takes under 10 minutes, and you can receive funding in as little as two weeks.
- No firm credit requirement. Hometap says that most of their successful applicants have a credit score over 600, but they don’t have a hard minimum to qualify.
- No credit impact. Hometap doesn’t conduct a hard inquiry, protecting your credit.
- 10-year limit. If you don’t sell your home in 10 years, you’ll have to pay back the investment with another source of funds (such as your savings). Long-term homeowners should be careful.
- Forced sale risk. If you can’t pay back the invested amount when the term is up, you could be forced to sell your home.
- Increased payout from your home’s appreciation. If your home substantially increases in value, you’ll end up paying a very big percentage relative to how much money you received upfront.
- Availability. Not available in all states.
Hometap Competitors and Alternatives
Hometap has two main competitors.
- Point. Point offers much longer terms of 30 years (which could be positive or negative depending on how you use your funds), with servicing fees ranging from 3% to 5%. You can access up to $500,000, depending on your home’s value and your equity.
- Unison. Unison also offers 30 year-terms, but the servicing fee is higher than Hometap’s at 3.9%. They cap the amount of cash you can receive at $500,000, but you can only receive up to 17.5% of your home’s value.
Learn more in our roundup of the best home equity sharing companies.
Key Questions About Hometap
You still pay the agreed upon percentage of your home’s value. That means you’d owe Hometap less than what they invested, resulting in a net gain for you.
Hometap’s investments are designed to be tax-deferred, so pending an unusual circumstance, you won’t owe taxes as a result of receiving an investment.
The impact of a Hometap investment on your taxes in connection with a settlement of the investment and/or a sale of your home will depend upon your specific facts and circumstances.
You’re still responsible for paying back the full amount of money you owe Hometap.
If you’re the sole homeowner, the obligation to Hometap passes to your estate and the lien stays on your property. If there’s a second homeowner, such as your spouse, the agreement doesn’t change.
If you get divorced following a Hometap Investment, the investment remains in place and the terms are unchanged. If you seek to transfer ownership of the home prior to settling your investment, you have to work with the company to coordinate on any such transfer of ownership.
My Hometap Analysis and Final Thoughts
Home equity share agreements are a very new way of thinking about using your home equity for the ability to obtain cash.
There are two things at play here:
- There’s the idea that using a home equity sharing company like Hometap is advantageous to using a home equity loan. This aspect is covered above.
- The impact this would have on you long-term. In other words, what is the opportunity cost of foregoing an equity stake in your home?
The rate of return one can expect on a home is between 8.6% and 10% per year. This isn’t as high as stocks, but it’s good.
Also, your mortgage is the one bill that always gets paid every month, no matter what. Homeowners do whatever it takes to pay their mortgage, because the consequences of not doing so are severe.
These are the reasons why, for the majority of households, their primary residence is their largest asset.
So if you give up an equity stake in your home, what’s your alternative plan to save money over the long-term? Is it a 401(K)? An IRA? An HSA?
Those are legitimate alternatives. And if a home equity share agreement frees up cash flow so you can increase how much you’re saving in these accounts, going with a company like Hometap can make sense.
With that said, I’d stay away from an option like this if your finances are tight and the home equity share would be used as a last resort (i.e., because you can’t afford the monthly payments a home equity loan would bring).
This might give you some short-term relief, but over the long-term, for households that haven’t been able to save much and don’t have an emergency fund, giving up a percentage of their home equity limits the upside of the one asset most non-savers actually do have.