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I’m a huge finance nerd, so I love to stay in the loop with all of the latest innovations of the FinTech companies. Recently, I read about the 2017 Finovate Spring Show and perused through the Best of Show award winners.
Typically, most of these award recipients include backend-type companies. Many of these companies attempt to make banking more secure by utilizing artificial intelligence. But then I stumbled upon Unison.
Home Equity Investing
Unison has an incredibly interesting concept to equity investing in homeownership. They offer themselves as an investment partner through a homeowner’s down payment on a home in exchange for a portion of the profit when the homeowner sells their home.
The concept intrigued me. Beforehand, I only thought of home equity sharing in instances when a parent buys a home with a child or when investors contribute to home-flipping projects.
When I first started learning about Unison, I thought there had to be a catch.
Well, there isn’t.
I spoke with Unison’s management team. They shared that if I was looking to buy a $400,000 home, if I put down a $40,000 down payment, Unison would then match the down payment up to $40,000, dollar for dollar.
If you put down 10% for the home, they will also contribute 10% towards the down payment for the home. It’s as simple as that.
The only restrictions are that the maximum down payment that they will make is $500,000. Also, the down payment cannot exceed 20% of the value of the property.
In other words, you couldn’t buy a million dollar home and make a $500,000 down payment, hoping that Unison would also put down a $500,000 down payment so that you could live mortgage-free. Believe me, I asked.
Profit or Loss
In exchange for the down payment, they require that when you sell the house that Unison receives up to 35% of the profits that you make on the home, plus their original down payment returned. On the flip side, if the home loses money during the period that you hold the property, they will contribute up to 35% on the loss.
Before all you home flippers become too excited, Unison has a couple exceptions. They only accept homebuyers who are buying a home that will be their primary residence for a minimum of 3 years and a maximum of 30 years. At 30 years, homeowners have the option to buy Unison out if they still want to live there, or they would have to sell at that point.
On top of that, you may not rent out your house. If you do, you will be in violation of the terms of the agreement with Unison.
How It Works
First, they must agree to invest with you on a down payment. Then, you are responsible to obtain the mortgage and pay all of the closing costs, along with any fees and taxes that occur along the way. Unison only contributes to the down payment. All other costs are yours to incur. Unison will not assist with paying for the closing costs or helping to make monthly mortgage payments.
Should You Consider Using Unison?
A 35% profit on a home is a lot of money to give up, right? Yes, but, there may be some benefits to consider along the way.
For instance, if having the down payment will help avoid paying Private Mortgage Insurance (PMI) and potentially lower your monthly payment by 15-20% a month, then it may be well worth it.
Private Mortgage Insurance (PMI)
Let’s say you decided to buy a $400,000 home with a $40,000 down payment. If you partner with Unison and receive a $40,000 down payment, you may be able to avoid paying PMI. Typically, homeowners who cannot put down 20% for a down payment must pay PMI, which costs 0.3% to 1.1% on an annual basis.
Following this example, if you had to pay PMI for almost 10 years, that could cost you anywhere between $1,050 to $3,850 (avg. $2,400) each year. Over a ten-year period, that is $10,500 to $38,500 (avg. $24,500).
In addition, you could pay over $221,000 in interest on a 30-year loan with a fixed interest rate of 3.5%.
Source: Credit Karma
However, following this example, using Unison as a partner, the interest would drop to around $197,000 for a savings of $24,000.
Source: Credit Karma
Let’s use the average PMI figure of $24,500 and the amount saved in interest of $24,000. That is a potential total savings of $48,500 in PMI and interest with Unison.
As long as your house does not increase more than $150,000 in gains over the 30 years, you would come out ahead in the transaction.
Likelihood of Coming Out Ahead
Historically, housing prices have risen by 3.5% per year. Over 30 years at a rate of 3.5%, that $400,000 home could be worth $1,100,000 if it continues to grow at a linear rate.
Speaking from experience though, since buying my house in 2004, my home’s value has only risen at a rate of 1.6% over the last 13 years. So, you can’t always assume that historic trends will continue at the same rate.
Right now, Unison has restrictions on which states that they can currently invest in. Here is a list of the states that they serve.
- New Jersey
- New York
- District of Columbia / Washington D.C.
If you think that Unison would be a good partner for you, they will provide you a free home quote.