Traditionally, using your home equity to get cash meant taking out a loan or credit line. Although useful, these debt products involve making 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 to their bills.
One such company is Hometap, which will give you funds upfront in exchange 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 adding 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 that Hometap is investing in.
Imagine you have a $100,000 home and you strike a deal with Hometap for 20% of your home’s current value, or $20,000. Then five years later, you sell your home.
You’d pay Hometap 20% of the sale price.
So if your home had appreciated to $130,000, you’d owe Hometap $26,000 out of your proceeds.
Note: In this example, you’ll pay $6,000 later for $20,000 in cash today, or a 30% overall cost.
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.
This can help or hurt you, depending on your local housing market.
For example, let’s go back to the previous example. Say that the housing market took off after you got cash from Hometap, and by Year 10, your home has appreciated to $150,000. In this case, you’ll owe Hometap $30,000.
Note: In this example, you’ll pay $30,000 later for $20,000 today, or a 50% overall cost.
But if your home’s value dropped to $80,000, you’d only owe Hometap $16,000 — meaning you’d end up with a net gain of $4,000 (or 20%).
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’d do with a standard HELOC.
However, Hometap is not a free service.
As noted in the previous section, you are agreeing 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.
For example, if your home is worth $100,000 and Hometap takes a 20% investment, you’ll get $20,000 (minus other costs and fees, as described below). If your home appreciates to $150,000 in value and you sell it, you’ll have to pay Hometap 20% of those proceeds — or roughly $30,000.
$30,000 is 20% of $150,000, but it’s 150% of $20,000 — the amount of money you initially received from Hometap.
In other words, you’re paying back a 50% premium on the initial investment.
However, you also have to take into account the length of the investment. Receiving $20,000 today, while having to pay back $30,000 in ten years is comparable to a loan with a 4.13% APY. A similar agreement, that lasted only four years, is comparable to a loan with a 10.7% APY.
Hometap Costs and Fees
In addition, 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.
You also have to factor in the following.
- 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. HELOC
Let’s go back to our $100,000 home example.
But this time, let’s say we got a home equity line of credit (a HELOC) for the same 20% amount, or $20,000.
Hometap lists the average HELOC interest rate at 6.04%, so we’ll use that as your interest rate.
Here’s how that breaks down:
- Initial home value: $100,000
- HELOC amount: $20,000
- HELOC interest rate (based on Hometap’s estimate): 6.04%
- Monthly payment: $222.44
- Total paid at end of 10-year term: $26,692.80
Additionally, HELOCs charge annual fees of around $1,000.
So according to these figures, you’d pay $27,692.80 (principal + interest + annual fees), regardless of fluctuations in your home’s value.
In this case, the point where Hometap breaks even with a HELOC is at a home value of $138,464 ($27,692.80 is 20% of $138,464). If your home stays below that figure, Hometap is the better choice.
That said, you can save on interest with a HELOC by paying more than the monthly payment.
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 Hometap to give you a renovation adjustment to exclude that figure from their settlement calculation.
To do this, you’ll need to get a new appraisal of the property. You’ll also need to hold onto receipts associated with (and photographs of) the renovations.
Let’s look at an example:
Say you have that $100,000 house, and you get 20% from Hometap. Your home appreciates by $20,000 due to market forces over 10 years. However, you also renovate your kitchen, which adds another $30,000 to your home’s value.
You would then request a renovation adjustment from Hometap at settlement, provide the necessary evidence, and get your property appraised.
Your $30,000 renovation appreciation is excluded from the final calculation, so you owe $24,000 instead of $30,000.
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’ll request an estimate to see if you prequalify. 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 September 10, 2021:
- New Jersey
- New York
- North 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 you received.
- No vacation homes. Hometap doesn’t invest in vacation homes at the moment.
- Availability. Not available in all states.
Hometap Competitors and Alternatives
Hometap has a few key competitors.
- Noah. To get cash from Noah, your property value has to exceed $300,000. You can receive up to $350,000, and the term length is 10 years.
- 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.
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 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 HELOC. This aspect is covered well 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.
Where I’d stay away from an option like this is when finances are tight and the home equity share is mostly used as a last resort (i.e., because you can’t afford the monthly payments a HELOC 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.