How Unlock And Other Fintechs Offers Ways To Tap Equity, Repair Credit

California retiree Tom McCabe wanted to tap into some of the equity in his home north of San Diego, but he wasn’t keen to go through the paperwork and weeks of waiting that typically accompanies a cash-out refinance.

So McCabe extracted some of his home equity in a different way. He sold a stake in his home to Unlock, one of a new breed of companies that give homeowners access to their housing wealth without borrowing against it.

McCabe took about $350,000 from his home’s equity, money he might use to build an accessory dwelling unit.

“This was done in less than a week. It was super-quick,” McCabe says. “It gives me a lot of peace of mind to have that large sum in my bank account.”

McCabe is one of about 700 homeowners who have taken on Unlock as an investor in their homes. This alternative to cash-out refinances and home equity loans is gaining momentum amid the pandemic housing boom. Americans held a record $25.3 trillion in home equity as of the third quarter of 2021, according to data from the Federal Reserve.

How it works

Unlock’s selling points are clear: Homeowners get cash and are on the hook for no monthly payments. Instead, Unlock shares in the appreciation of your home over a 10-year period. Homeowners can buy out Unlock before then.

Unlock says a typical agreement might exchange 10 percent of the current home’s value for 16 percent of the future home’s value.

For example, if your home is worth $400,000 today, you might sell a stake to Unlock for $40,000. Eight years later, you sell the property for $800,000. When you close the deal, you would owe Unlock $128,000.

The company says the annualized cost of the agreement never will exceed 18 percent, and that annualized cost falls the longer you hold your agreement.

Unlock also charges an origination fee of 3 percent of its investment. And the homeowner pays any required third-party expenses to appraise and inspect the home and to record the transaction.

Compared with a standard refinance, that’s a steep cost. But Unlock CEO Jim Riccitelli says his investments aren’t meant to appeal to homeowners with plenty of options.

Instead, he says, Unlock offers “restorative finance.” Ideally, homeowners will use the money to get their financial lives back on track – for instance, by paying down high-interest credit card debt and improving their credit scores. Then they can buy out Unlock and refinance with a traditional, lower-cost loan.

“We help the people who don’t qualify for the loan,” Riccitelli says.

How Unlock compares to other home equity investors

Unlock didn’t invent the idea of investing in homes. Other players – including Noah, Point and Unison – have similar models. Unlock distinguishes itself by doing deals with homeowners in deep financial trouble.

Unlock will work with homeowners with credit scores as low as 500, so long as they owe no more than 80 percent of the home’s value. Unlock’s competitors, by contrast, typically require minimum credit scores of 580 to 620.

“We were built to serve the community of homeowners who are struggling,” Riccitelli says. “There are millions – more than you would think. The combination of stagnant wages, rising costs, massive debt and shrinking safety nets mean you’ve got a tale of two populations.”

For a homeowner struggling with a job loss, mounting medical bills or some other financial difficulty, a mortgage refinance or a home equity line of credit isn’t an option.

“These are people who don’t have access to a refinance,” Riccitelli says. “They don’t have access to a HELOC at 6 percent. Their option is a credit card cash advance at 25 percent. We’re still generally cheaper than the alternatives they have.”

Pros and cons of an Unlock agreement

Getting a chunk of money soon without the need to make payments or owe additional interest is appealing, but there are upsides and downsides to “unlocking” that cash. Before you sign on the dotted line, weigh the immediate benefit of cash in the bank against the long-term costs.

Pros

  • No monthly payments
  • No finance charges
  • A minimum credit score of just 500 to qualify
  • No income requirement
  • Soft credit check, which does not impact your credit score

Cons

  • You won’t make as much money when you sell your home
  • Origination fee, plus other fees for appraisal, inspection and recording
  • Unlock is available in 17 states
  • An expensive way to get out of a financial bind

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