Comparing Unison to traditional programs
There are traditional programs that let homeowners capture their equity or receive down payment assistance, but how do they compare to Unison?
How Unison compares to a HELOC
A homeowner can take out a home equity line of credit, or HELOC, when they have equity in their property. Typically, HELOCs are available to homeowners who have good credit (620 or higher) and a debt-to-income ratio of 43% or less. A HELOC charges interest over a short period, such as five, 10, or 20 years.
While it can be a fixed-rate loan, home equity lines of credit are have variable rates, which means payments increase over time and interest rates are higher than a standard first mortgage. A HELOC's major drawback is that the owner is responsible for an additional payment, potentially giving them two mortgage payments to keep up with. The major benefit to a HELOC is that the balance of the loan is paid down each month, meaning there's no lump sum due. Let’s compare a HELOC to Unison's HomeOwners Program to see which is a better option.
Let’s say you own a home worth $400,00 and you want to pull out $50,000 from your home’s equity. You can get a HELOC at a 6.1% introductory rate for 60 months that adjusts 0.25% every 12 months and is capped at a 9% interest rate. Over the 10 years, your monthly payment would range from $557.62 to $567.99.
You're still responsible for maintaining the home, paying taxes, and any other mortgage payments in addition to your monthly HELOC payment. In total, you would pay $17,366 in interest for a total of $67,366 paid to the bank. At the end of the 10 years, you owe nothing to the bank and can enjoy any appreciation or equity you've built into your home.
Now, let’s say you went with Unison’s HomeOwners Program and received $50,000 in cash, which is equal to 13% of your property’s value. In exchange, you agree to share 50% of any appreciation made on top of your $400,000 home value at the time of the transaction.
If the home appreciates at a conservative 2% per year (currently, the national average home appreciation is around 3.6% per year), your property would be worth around $480,000 at the end of 10 years. If you sold at this time, you would owe Unison $40,000 in addition to their initial investment, totaling $90,000. That’s far more than the $17,366 in interest you'd pay to the bank with a HELOC.
However, if your property value drops to $380,000 after 10 years, you'd only pay Unison $40,000. The shared loss of $10,000 each is deducted from the $50,000 loaned to you.
In this scenario, Unison’s program prevails only if your property decreases in value, stays the same, or the you simply cannot afford an additional $557 monthly payment.
How Unison compares to a reverse mortgage
A reverse mortgage is a loan available only to people age 62 or older who have equity in their home. (It’s challenging to compare reverse mortgages to Unison because of the age qualification.)
Homeowners can receive the equity as a lump sum, a fixed monthly payment, or a line of credit where the homeowner draws from the loan as needed. Reverse mortgages require no payments over the life of the loan, but the entire balance with interest becomes due when the homeowner dies or sells the property. Interest rates vary for reverse mortgages and can be fixed or variable. Reverse mortgages can become very costly if the homeowner lives for a long time, as the interest accrues over that period.
As with a HELOC, if the property continues to appreciate even at a slow pace, the homeowner could pay substantially more with Unison than they would with a reverse mortgage.
However, Unison’s program is available to anyone regardless of age, and if the property value stays the same or depreciates, there's no additional payment needed. If you're looking for a lump sum from the equity in your home without payments, Unison’s program is one of the better options.
How Unison compares to down payment assistance programs
There are many down payment assistance programs available to homebuyers; especially first-time buyers. They vary in terms and the amount available. Some place the down payment assistance as a subordinate, second-lien-position loan that's due when the home is sold, while others have no repayment and the down payment assistance disappears after a set number of years.
Most of the programs are conditional and require the homebuyer to meet certain income thresholds or hold a specific job, like a teacher, firefighter, or police officer. This greatly limits who can take advantage of these programs, making Unison one of the only down payment assistance programs available on a large scale.
If you're considering using Unison for the down payment assistance program, be aware of what it will cost over time, especially if the property appreciates. Also keep in mind that, while there are no payments, it's wise to set money aside for repaying Unison.
In most circumstances, if you're trying to eliminate a PMI payment and lower your monthly payment, it’s best to save until you have enough for a 20% down payment plus closing costs.
Using Unison’s HomeOwner Program to buy an investment property
Let’s see if Unison’s program would make sense if you used the cash from your property’s equity to buy another investment.
We'll use the same example scenario as above, where you use Unison's HomeOwner Program to get a loan for $50,000 and agree to split the appreciation on your primary home 50-50. Your home is currently worth $400,000, and it will be assessed again at the end of the 30-year loan.
You used the $50,000 as a down payment on a rental property, getting a $200,000 30-year fixed-rate mortgage.
The new investment property produces a positive net cash flow of $400 per month after expenses and paying the mortgage, which is a 9.6% cash-on-cash return on investment.
Assume that your primary residence appreciates at 1% per year. After 30 years, it would be worth $520,000. Based on the original equity split of 50%, you would have to share $60,000 of the property's $120,000 appreciation with Unison in addition to repaying the $50,000 originally withdrawn from the equity of your primary residence.
At this point, the 30-year mortgage on the investment property you purchased is paid off. But you now owe $110,000 to Unison. We'll say your investment property has also appreciated by 1% every year, so you can now sell it for $325,000 to pay off Unison.
You would walk away with roughly $195,000 before taxes. And you've received $400 per month for the past 30 years without putting any of your own money into the investment.
Unison’s program may be a viable option when used to invest in property, but doing so means you're putting the future equity of your personal residence on the line.
Unison in summary
In almost every scenario, Unison will cost more than alternative programs if the property appreciates.
However, it may be a suitable choice for homebuyers that would like to lower their monthly payment by using additional down payment funds to get their foot in the door to homeownership and are willing to pay more for it on the backend.
It also makes sense for homeowners who don't believe their home will appreciate greatly over time and are willing to share the appreciation for the benefit of having a lower monthly payment now or to use the funds to create an additional income stream.
Unison’s alternative lending model and unique program offer attractive benefits for homeowners and homebuyers, but have disadvantages, too. As with any lending program, read the fine print and understand how the program would affect you before committing.