Hometap Review: Access Your Home Equity

Some people have a home that has gone up in value, but they're unable to take advantage of it. This might be because of bad credit or too much debt.

Taking out a home equity loan has similar requirements to taking out a traditional loan. So those with less-than-stellar credit may not be able to access the equity in their home. Others, may want to avoid taking out a home equity loan because they don't want to add another monthly payment obligation to their financial lives.

Hometap uses an alternative method to provide access to home equity. Instead of lending, they invest in the home. The homeowner receives funds in the amount of the investment. This is a new spin on home equity. Let’s see how it works.

Who Is Hometap?

Hometap (Hometap Equity Partners, LLC) is a fintech company that provides an alternative method for accessing home equity. The company is based in Cambridge, MA, and was founded in 2017. Its CEO is Jeff Glass. It has raised $112 million through a Series B.

“We’ve been working diligently towards our mission of making homeownership less stressful and more accessible for as many U.S. homeowners as possible, and we’ve had tremendous success thus far...” said Glass to AP News. "...But there’s a lot more work to be done to make home equity investments an option that’s available to everyone.”

What Do They Offer?

Hometap provides an alternative way for homeowners to tap into their home equity without taking on a loan. Traditional home equity or a credit line based on home equity requires homeowners to go through a loan qualification. This means pulling credit and analyzing income and debt. The process can take a while.

HomeTap provides funds to homeowners by investing in their homes. This is similar to a venture capital partner investing in a business. The venture partner will make a return on their investment if the business grows in value.

It’s the same with Hometap. The home must appreciate for the company's investment to generate a return. Hometap allows 10 years for its investment to appreciate. If after 10 years the home has not appreciated, the company will likely take a loss on its investment.

Not A Loan

If Hometap is not a loan, what exactly are they doing? Hometap is taking equity in the home by providing the homeowner with an investment. The homeowner can use the invested funds however they like.

Since the invested funds are not a loan, there are no monthly payments. Hometap’s investment is more like a home equity sharing agreement. They are investing purely in the future value of the home. There is no credit check, athough Hometap likes to see FICO scores above 600.

Hometap makes a return on its investment when the home is sold or refinanced. You can get out of the investment by buying out Hometap. This might be with savings or by taking out a home equity loan. 

No Inspections

Hometap doesn’t invest blindly into a home. Homeowners don’t have to worry about inspections to receive funds but an appraisal is required. After all, they're trying to predict what the home’s value will be in 10 years.

Investment Requirements

Hometap’s process isn’t as involved as getting a traditional bank loan. However, they do have a few qualities that they say tend to make for a good fit as stated in their FAQ. These are:

• A credit score above 600
• A minimum of 25% equity in your home
• An investment amount that's less than 30% of your home's value

Note that the maximum amount that Hometap is able to invest in a single property is $400,000.

During the investment period, Hometap requires homeowners to maintain the mortgage, homeowners insurance, and property taxes and to keep the house in good shape:

Availability

Hometap is not yet available nationwide. As of writing, it's able to invest in properties that are located in the following states:

• Arizona
• California
• Florida
• Maryland
• Massachusetts
• Michigan
• Minnesota
• New Jersey
• New York
• North Carolina
• Oregon
• Pennsylvania
• Virginia
• Washington

10-Year Payback

The biggest risk with Hometap would be the inability to pay back the investment at the 10-year mark. Hometap says you can sell your home, take out a loan, or use cash savings to pay back the investment.

However, what if none of those are an option? In that case, Hometap can force the sale of your home to recoup its investment. Additionally, you’ll have to pay back a larger amount if the home’s value has gone up significantly. If you don’t have access to enough cash or financing, the only option might be to sell your home. 

But there is still a risk there — what happens if you aren’t able to sell the home for the listed market value? You could still end up in a forced-sale situation.

While ten years is a fairly long time, it's not as long as some of Hometap's competitor's give homeowners to settle their investments. For example, Unison and Point both offer terms that are three times as long (up to 30 years).

Hometap vs. HELOC

Many homeowners considering a Hometap investment will want to know how it compares to a home equity line of credit (HELOC). So let's take a closer look at the benefits and drawbacks of each.

We'll start with the biggest difference between these two. A home equity investment is not a loan whereas a HELOC is. A home equity investor only makes money if the home’s value increases. A HELOC lender makes money on interest, which is paid monthly. For the borrower, since a HELOC is a loan, there will always be a cost. Both usually have a 10-year minimum term.

A HELOC will have a higher maximum loan amount (up to 85%). Hometap caps its investment at 30% of the home’s value or $300,000. With a few high-level concepts out of the way, let’s crunch some numbers. 

Costs Of A Hometap Investment

Let's say you have a home that is currently worth $300,000. Hometap takes a 20% equity stake in the home. You receive $60,000 minus the 3% fee for a net of $58,200.

Seven years later, the home has increased to $400,000. Hometap's 20% investment is now worth $80,000. If you sell your home for $400,000, you'll need to pay back $80,000 to Hometap. Looking at it another way, you paid $20,000 to borrow $60,000 for seven years, which is equivalent to a loan with a 8.57% interest rate. And yes, it is not really borrowing, but it did cost $20,000 to take possession of $60,000 for seven years (a very wordy way of saying, it’s a loan).

On the other hand, the investment could work in the homeowner’s favor. If the home’s value falls to $275,000 after seven years, Hometap’s investment will drop to $55,000, netting the homeowner $5,000. Given the direction of home values over the long-term, looking for the value to drop probably isn’t the highest probability bet.

Taking a smaller investment will minimize the investment’s impact no matter which direction the housing market goes. Going with the first example of the home value increasing to $400,000, a 10% investment will increase from $30,000 to $40,000. A 5% investment will increase from $15,000 to $20,000. How much investment to take really depends on what the homeowner is comfortable with.

In addition to Hometap’s fee, factor in a few hundred to a few thousand dollars for related document and filing costs.

Costs Of A HELOC

So how does Hometap compare to the cost of a HELOC? Many HELOCs come with adjustable rates and a few hundred dollars per year in fixed fees. We’ll use 6% and $300 for our fees.

Taking out the same $60,000 for seven years, we’ll have a monthly payment of $877 and total interest of $13,627. We also need to add in our annual fee of $300 x 7 = $2,100, for a total of $15,727.

However, over seven years, the interest rate will adjust. Considering the adjustable rate, we probably wouldn’t be too far off to say the total HELOC cost is around $20,000. In this case, we get a wash between the HELOC and Hometap, when looking strictly at the numbers.

But what if the home’s value increases to $450,000 or $500,000? That means Hometap’s equity increases as follows:

• $450,000 — $60,000 to $90,000
• $500,000 — $60,000 to $100,000

In both cases, the HELOC will come out ahead. For the risk-averse, it certainly looks like the HELOC wins. And that isn't even factoring in the 10-year payback (potential) issue or the few hundred to thousand dollars in document and filing fees. 

Related: When It Makes Sense To Use a HELOC For Your Student Loans

Are There Any Fees?

Yes — Hometap charges a 3% fee based on the investment amount. The fee is subtracted from funds the homeowner receives. You’ll also have to pay for fees related to escrow, attorney/notary, and document recording.

How Do I Get Started?

You can visit the Hometap website to start the estimation process. It will take about 10 minutes. Once approved, you may receive funds as early as two weeks from starting your application.

Is It Worth It?

If you want to access your home’s equity but don't want to take out a loan, Hometap is worth considering. It could especially be a good option if you plan to sell your home within the next 10 years as you'll be able to apply the sale proceeds towards your investment settlement.

But if you plan to stay in your home for 10+ years, you'll need to have a plan for how you'll repay Hometap before the end of your investment term. If you like the Hometap concept but would like more repayment flexibility, you may want to consider Unison or Point which each offer 30-year terms.

Hometap Features