January 2020

January 28, 2020June 23, 2022

Comparing a Home Equity Loan vs. a Home Equity Investment

As a homeowner, so much of your worth is tied up in one illiquid asset — your home. Fortunately, you have the advantage of being able to tap into your home equity to fund other goals, such as paying off debt, starting a small business, funding an education, or renovating your home.

You have a number of ways to access your equity, too. To meet your short- and long-term financial goals, you’ll want to understand all your options before moving forward.

Understanding Your Finance Options

What is a Home Loan?

A home loan or home equity loan allows you to borrow against the equity you’ve accrued, using your home as collateral to guarantee the loan, and is granted by a lender, like a mortgage company, credit card company or a bank or credit union.

What is a Home Equity Investment?

Home equity investments give you cash today for a portion of the equity you’ve accrued in your home in exchange for a share of the future value of your home. Since it’s an investment, not a loan, there are no monthly payments and no interest. There is typically an effective period in which the homeowner is given to settle the investment, either through the sale of the home or by other means.

What is a HELOC?

A home equity line of credit or HELOC is like a credit card: you can borrow money using your home’s equity as a source of funds. Typically, HELOCs have annual fees and require you to draw a minimum amount each year. You have a period where you can draw money—in some cases up to 10 years—and then a repayment period.

What is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new home loan for more than you currently owe on your house. That means you get a larger sum of money than what you owe. Most people use a cash-out refinance to pay down debt or increase their home’s overall value through strategic home renovations.

Compare Your Options

Home Loan vs. Home Equity Investment

According to Hometap’s 2019 Homeownership Survey, when asked how homeowners feel about their options for accessing their home equity, 37% of homeowners answered that while they could get a home equity loan, but prefer not to, while 12% said they have no good options at all for turning the equity in their homes into cash.

That’s because many homeowners, particularly those looking to reduce debt with their home equity, don’t like the idea of an additional monthly payment or unpredictable interest rates. With a home equity investment, you’re not taking out a loan so there are no monthly payments and there’s no interest. Instead, you’ll settle your investment when you sell your home or if you decide to buy out your investment once the term is up. If you plan on selling your home within 10 years, you may find this is the smartest option for you.

If you plan on staying in your home for more than 10 years, you’ll want to determine if you can settle your home equity investment when the time comes. Generally, homeowners settle their home equity investment by selling their home or buying out the investment with savings or refinancing. If you know you want to stay put, you may decide a home equity loan or other loan is the best fit for you.

Cash-Out Refinance vs. Home Equity Investment

With a cash-out refinance, you’re taking out a larger mortgage, so may have bigger payments than you do now and more interest over the life—often 15 to 30 years—of the loan. But, if you can find a better interest rate than your current mortgage, it may prove to work for you in the long run, particularly if you’re looking to fund something like higher education and can secure a lower interest rate than private education loans.

If a cash-out refinance won’t lower your interest rate, then you’ll want to look to your alternatives. Average interest rates for home equity loans are often higher, but the terms are shorter and your original mortgage—and its interest rate—won’t change.

It’s also a smarter choice if you don’t need a large sum of money. For example, if your debts total $25,000, you may find a home equity loan can help you pay it down while a cash-out refinance gives you access to more money than you need—with expensive closing costs, longer terms, and more interest over the years.

With both a cash-out refinance or home loan, you can face foreclosure if you default on your loan.

HELOC vs. Home Equity Investment

While HELOCs often have lower interest rates than home equity loans, they’re often variable, meaning you may start a low interest rate but then face high interest rates that make monthly payments more difficult. As with other loan options, you risk foreclosure if you default on your HELOC. HELOCs also have significant penalties for prepaying your loan. They often make sense when you aren’t sure how much money you need or when you’ll need it, since you have access to a revolving credit line for a set amount of time.

Home equity loans may be a smarter option than a HELOC when you know you have a large expense, like a home remodel or funding college tuition. They are also more useful for consolidating debt because you get a single payment, often with a lower interest rate than the interest rate on your debts.

So, what’s the best home financing option?

The option that’s best for you depends on your goals and financial situation. Take the time to compare not only the terms of each type of loan or investment product, but the qualifications for each, too. The following comparison chart helps put some of these details into perspective:

You may find that boosting your credit score is the first step to accessing your home equity the way you want. Or you may find that you need to build more equity in your home before you can use it to fund your other financial goals.

By doing your research, you’ll be able to tap into your home equity with confidence, knowing you’ve made the best choice for your financial health.

See if you prequalify for a Hometap investment in less than 30 seconds.

YOU SHOULD KNOW

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

January 21, 2020January 13, 2021

Help Your Parents Retire Without Compromising Your Finances

It’s no secret that saving for retirement requires hard work starting long before retirement. But many workers who are nearing or at retirement age are finding they’re unable to retire because they don’t have enough money saved. In fact, Insured Retirement Institute data suggests that as of 2019, 45 percent of Baby Boomers have nothing saved for retirement. Hometap’s 2019 study on homeowner stress that looked into the house-rich, cash-poor phenomenon shows that Baby Boomers have more debts they’re struggling to pay down than in previous generations, pushing many to retire after age 65.

If you’re the child of a Boomer, this data is alarming. You want to see your parents enjoy retirement, but it’s likely challenging to offer financial help without risking your own financial wellbeing. But by getting your parents back on track, you can break the cycle, ensuring your own children don’t have to help you in retirement.

Meet the Sandwich Generation

According to a PNC survey, 16 percent of respondents are caring for parents or elderly family members, and many of those are also caring for children, too. This financial sandwiching effect poses a major challenge for those stuck between generations, hence the nickname “the Sandwich Generation.”

So, how do you help your parents without hurting your own financial standing? Perhaps you have the means to help—great! But, if you’re like most, you may only be able to help so much, leaving both your own family and your parents in a not-good-enough situation. Or maybe you don’t have the ability to help at all. If you find yourself in one of the two latter groups, there are ways you and your parents can thrive in retirement.

1. Perform Financial Triage ASAP

If you’re unsure of where your parents’ finances stand, have a gut feeling they’ll ask for help down the line, or have already been asked for help, the first step is to have an open and honest conversation. Your parents, as your caregivers, may have a hard time giving up the caregiving role. Let them know you’re not worried about your inheritance, you’re worried about your own financial future and don’t want bitter emotions to take a toll on your relationship if they end up needing significant financial help down the line. If you have siblings, you’ll want to address this as a team.

If they’re open to it, take stock of their expenses (including any they can cut), debts, and available income from either a pension or Social Security benefits to begin retirement planning. You’ll want to help them plan for healthcare costs, which, on average, adds up to 15 percent of annual expenses. Check for any tax credits they may qualify for, too.

2. Confer with an Unbiased Third Party

If you have the means, particularly if your parents are reluctant to talk openly with you about their finances, consider getting a fiduciary financial advisor involved. A fiduciary has a responsibility to the individual they’re helping—not an organization that they work for. This can give you peace of mind that the advisor will guide your parents to products and services that will work best for them.

While your parents may feel embarrassed talking with you, they may feel more comfortable with an advisor. Advisors can also check that your parents have the right investment mix and steer them away from any get-rich-quick schemes that tend to target older generations.

3. Consider Downsizing

One way your parents can access necessary funds for an early retirement and reduce expenses is by downsizing their home. Moving into a smaller home can reduce monthly mortgage costs in addition to energy expenses like heating, lawn care, and other maintenance upkeep costs.

It’s also possible to move to a location where you can reduce transportation costs, too. If your parents are still mobile and can use public transportation, they can reduce car costs like insurance, gas, and maintenance. Being around services they need increases convenience and may even allow them to find a part-time job to supplement income.

4. Help Your Parents Access Their Home Equity

Your parents don’t have to sell or downsize. There are several government housing programs for those of retirement age, including reverse mortgages that allow homeowners to access a portion of their home equity. However, reverse mortgages get tricky if an unexpected illness takes you out of your home for more than a year. In this case, your parent(s) would be faced with paying back the loan in full. Fortunately, there are more solutions for accessing home equity that don’t require a reverse mortgage.

Read 3 Ways Home Equity Can Fund Your Retirement »

Many retirees find that a home equity loan or home equity line of credit is a way to retire when they want (or have to), but delay Social Security benefits until 70 when they can maximize their benefits. But you need a plan to pay that money back. If your parent unexpectedly has to move to a more accessible home, for example, that money is owed back.

Unlike a loan, a home equity investment allows your parents to access a portion of their home equity in cash now in exchange for a share of the future value of their home. And since it’s an investment and not a loan, there are no monthly payments or interest. Many Hometap homeowners find a Hometap Investment is a way to live comfortably in retirement, whether that’s paying off debt or making necessary home renovations to age in place. Plus, you can do a lot of the legwork on behalf of your parent if your parent is unable or wants you to manage the process. There are two steps in which the homeowner must play a role:

They will sign a consent form that allows Hometap to run a soft credit pull
They must be present on the day of the signing to sign investment documents.

Frequently, Hometap Investment Managers will have initial discussions with the adult children of the homeowner, and then have joint calls with all parties on the call to understand the details of a Hometap investment.

As you help your parents navigate their financial future, remember money isn’t the only way to help your parents and, in many cases, is not the best way to help them either. Taking the time to help them understand their options and get their finances back on track for the long-term ensures everyone can thrive in retirement and that your relationship can thrive, too.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

January 20, 2020March 22, 2021

Hometap among Built In Boston’s 50 Startups to Watch in 2020

According to Magnify Money, 40 percent of mortgages originated with banks in 2018. But working with banks has its own challenges in terms of accessing loans, managing credit scores and navigating interest rates. With Hometap, homeowners can access cash from the equity they’ve accumulated on their homes by selling a percentage of the equity in their homes to Hometap. When the home sells or the homeowner settles the investment, Hometap is paid out an agreed-upon percentage of the sale price or current appraised value. The company uses automated technology to streamline the process and offers proprietary financial models and forecasting tools. The startup raised $100 million in Series B funding in December 2019. This article originally appeared on Built In Boston. Read the full article.

January 7, 2020June 17, 2022

How to Find the Financing Option That Best Fits Your Small Business

If you’re ready to launch or grow your business, the financing options can feel overwhelming. The first step to securing capital is knowing about the best small business loans for small businesses—and the pros and cons of choosing one over the other.

Small Business Administration (SBA) 7(a) Loan

This small business loan program is the main way the SBA, a U.S. government organization, offers assistance to those looking to finance their company. These loans for self-employed individuals and small businesses provide up to five million dollars. While you’re restricted to business uses, you’re able to use the funds for multiple needs, including construction or renovation, working capital, inventory, or the purchase of land, buildings, and equipment.

Within the program are several loan types, with some eligibility decisions made by your lender and some made by the SBA. Loan amounts, terms, fees, interest rates, and more vary by the loan. For example, there are Veterans Advantage SBA loans that come with reduced fees and SBA Express loans that reduce the turnaround time for SBA review, as well as SBA Disaster Loans intended for businesses affected by the COVID-19 pandemic, natural disasters, or civil unrest. You’ll want to find an SBA-approved lender who can help you determine the best option for you.

Pros:

Because the program is backed by the government, it decreases the risk for the lender, making them more likely to work with you once you’re approved.
Decreased lender risk also means you may be able to secure a longer repayment term, resulting in lower monthly payments.
While interest rates vary by loan, they’re often quite low. “For a patient entrepreneur who has her ducks in a row and is willing to go through the process, it’s a lot cheaper capital,” says Bob Coleman, who publishes The Coleman Report, a popular SBA intelligence report.

Cons:

Some lenders put restrictions on how you can use the funds.
You’ll want to make sure if you’re using funds for things like fixed assets (equipment, remodeling) or to hire more employees, that your loan allows you to do so.
SBA loans may take longer than another type of loan — often 60 to 90 days—and you’ll need a full business plan, financial statements, and business licenses, among other documents.
Certain industries— gambling, firms involved with lending, and religious organizations, for example — don’t qualify for SBA loans.

Was your SBA loan application rejected? Read ‘4 Reasons Your Business’s SBA Loan Application Was Denied‘ to learn what to do next.

Merchant Cash Advance (MCA)

A merchant cash advance, also known as a merchant loan, is designed for businesses with credit scores that may have a difficult time securing a traditional loan. Similar to a small business payroll loan, you get a sum of cash in exchange for a share of your future credit or debit card sales that you repay with set withdrawals (plus fees) from your bank account, usually over a period of three months to a year. It can be a good option for those with less than stellar credit, since the potential to pay back the advance with sales is a more important criterion.

Plus, you can get money very quickly; usually within 48–72 hours of application.

“Merchant cash advances are engineered for speed,” according to Brock Blake, CEO and founder of small-business lending platform Lendio. “If your business has an urgent need, such as a crucial piece of equipment breaking or a lucrative opportunity to seize, an MCA will give you quick access to funds.”

Pros:

Compared to your other options, an MCA is fast and requires minimal paperwork.
If your repayment rate is based on a set percentage of your business sales, your monthly payment may be lower if your revenue decreases in a given month.
You don’t have to back an MCA with collateral.

Cons:

Depending how fast you pay it back, you may face massive APR — as high as a whopping 350%.
If you’re paying back with a percentage of debit and credit card sales, you can face higher APR if your sales skyrocket.
There’s no federal regulation or oversight, since an MCA is technically a commercial transaction instead of a loan.
It’s hard to really determine what the MCA will cost you—and if it’s worth the risk of falling into deeper debt.

Crowdfunding Loan

Crowdfunding allows you to set up a campaign online with your fundraising goal and request money for a specific project. Typically, you’ll offer something to supporters in exchange for their contribution. That may be your product or service, or it may be a share of stock in your company.

While there’s no guarantee that your crowdfunding campaign will be successful — many companies have failed to reach their goal — there are also a number of well-known companies like Pebble and Oculus that got their start this way.

“Crowdfunding works for all kinds of companies at all different stages,” says CEO of crowdfunding platform Republic, Kendrick Nguyen. “But the companies that have the most successful campaigns tend to have the largest and most engaged communities behind them — usually of customers or users or other supporters of their mission.”

Similar to crowdfunding, peer-to-peer lending sites like Lending Club help connect established businesses to investors. It works somewhat like a loan in that you’ll pay interest and have a three- or five-year repayment period. However, instead of financing your loan, Lending Club simply services it. The site’s investors choose whether or not to invest in your loan.

Pros:

Some crowdfunding sites allow you to repay investors with products or services instead of with cash.
Depending on your project, there may be fewer barriers to entry and the process is often quicker than traditional loan processes.
It can be a good way to test the market and gauge the demand for your business before building it out.

Cons:

You may face tax obligations.
While you can promote your campaign via your social and professional networks, there’s no guarantee your campaign will succeed — investors aren’t guaranteed.
For some platforms, if you don’t reach your goal, you don’t access the funding.
If your campaign doesn’t get adequate exposure, it may lead you to falsely conclude that there’s not enough interest in your product or service.

Small Business Equipment Loans

If you need an expensive piece of equipment or machinery — for example, manufacturing lines, company cars, or restaurant ovens — you may look into a small business equipment loan. Equipment loans are designed to help you cover the cost of adding new equipment and/or replacing old, outdated equipment that is too costly to repair.

Equipment loans are available through traditional lenders like banks, as well as online lenders. Some SBA 7(a) loans, as well as its 504 loan program, offer loans for equipment. It’s important to make sure that the loan amount and effective period line up with the equipment’s cost and your timeline for its use, so you’re not pressured to pay back the loan too quickly or for far longer than you needed the equipment.

“On one hand, a longer loan term will result in lower monthly payments,” says Tom Ware, senior vice president of analytics and product development at PayNet Inc. “On the other hand, a term that is longer than the useful life of the asset will result in payments still having to be made in the future, after the asset is no longer of value.”

Pros:

Often better rates compared to other loans.
Tax benefits, like deducting the interest you’ve paid and claiming depreciation.

Cons:

Some lenders may require you to have been in business for a set period of time before offering this type of loan and will likely want to see cash flow statements.
Your equipment serves as loan collateral, so you can lose it if you default on the loan.

If the equipment you need will likely become outdated fast, you may find leasing is a better option. The Equipment Leasing and Finance Association recommends leasing only if you plan to use the equipment for three years or less. You likely won’t need a down payment, either, so this can be a good choice if capital is tight.

Looking for Options Specific to Your Business? Read: The Best Small Business Loans for Niche Entrepreneurs

Using Your Home Equity to Fund Your Business

If you are a business owner and a homeowner, you have an additional option: Tapping into your home equity. Many business owners think twice about options like a home equity line of credit because there is the possibility of losing your house. This is particularly true if you’re just launching a business, as there’s no guarantee it will take off.

But a home equity investment can give you the capital you need now in exchange for a share of the future value of your home. Since it’s an investment, not a loan, you have no monthly payments or interest. Once the term is up, you can either buy out the investment or simply repay it when you sell your home.

No matter what option you use to start or grow your small business, you’ll want to carefully weigh your options and get the help of an expert to make sure you’re choosing the one that will best position you for personal and professional success. Use the chart below to weigh your options.

Take our quiz to see if a home equity investment is a good fit for you and your business needs. It takes less than five minutes to complete and could provide up to $400,000 in cash in as little as three weeks.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

January 6, 2020May 16, 2022

The Best Small Business Loans for Niche Entrepreneurs

When it comes to funding your small business, different small business loans have specific eligibility requirements and may have conditions on how you can use a particular loan. Owners of niche businesses, like restaurants, franchises, real estate, or women-owned businesses, may find loans available to their specific business type that aren’t available to others.

If you run a small business that falls into one of those niche categories, it’s worth exploring the loan options and alternatives that offer the biggest benefits for your business type.

Best Business Loans for Women

Women own 30% of all U.S. small businesses. But they don’t receive as much funding as their male counterparts: they account for only 16% of traditional loans. The SBA is making a push, particularly to help women-owned businesses compete for federal contracts. Last year, SBA 7(a) loans were up 22% for women.

If you need a smaller loan amount—up to $50,000—you may also want to look at the SBA Microloan program. Average microloans are around $13,000. There are also numerous grants for women-owned businesses, allowing you to grow business without worrying about paying the money back.

Best Loans for Restaurants

The best loan for your restaurant will depend on what you need. For example, if you need specific equipment, like a food truck or ovens, an equipment loan may provide the best option.

However, if you’re starting from scratch and need additional funding, turning to crowdfunding on sites like Kickstarter or Fundable is another option. Because many restaurants rely on debit and credit card sales, some restaurateurs find merchant cash advances (MCAs) appealing. But given the risks associated with MCAs, you’ll want to explore all of your other options first.

Read “How to Find the Financing Option That Best Fits Your Small Business”

Best Loans for Franchises

Franchisees will want to ask their franchiser about financing options first, as they may have options. If you’re the franchisor, Entrepreneur.com recommends finding help from a funding partner who can help you get prequalified for a loan.

Franchises can also secure SBA loans, but the franchisor must allow their franchisee, if they’re acting as the owner, to profit as such, too. If the franchisor is controlling operations of the franchisee, then the business would lose SBA eligibility. Crowdfunding is another option, though you’ll want to research crowdfunding platforms to find the one that’s best for your business type.

Best Loans for Real Estate

If you’re looking to purchase real estate for your small business, you can apply for an SBA loan. You’ll want to look at the 504 loan program, which allows you to use proceeds for purchasing existing buildings or land, constructing new buildings, renovating facilities, and more. However, if you’re looking to purchase real estate as an investment instead of occupying it for your business, you’ll need to look elsewhere.

There are also crowdfunding platforms for real estate companies. Sites like RealtyMogul and CrowdStreet offer the opportunity to secure funding for your project. You’ll want to explore the terms and if they’re right for you and your project, but they may be an option worth exploring if your project is getting sidelined by other lending options.

Small Business Loan vs. Home Equity Loan: What’s Best for Your Business?

The Option for Homeowner Entrepreneurs

Many business owners who are also homeowners are often hesitant about using their home equity to fund their business. That’s because with some options, like a home equity line of credit, you risk losing your home if your business doesn’t take off and you can’t pay the loan back.

However, you can tap into your home equity without a loan. Home equity investments give you a percentage of your home’s value now in exchange for a share of the future value of your home. As an investment, not a loan, you don’t face monthly payments or interest, but instead settle the investment when you sell your home or buy it out at the end of the term.

No matter what type of business you own or which loan you think sounds best, you’ll want to explore all your options and consult with lenders about which loans you qualify for to find the financing option that best fits your personal and professional needs.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.