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What Is Home Equity Sharing?

What Is Home Equity Sharing?The equity sharing approach to buying a home has been around for a long time. But recently it has become more popular due to rising mortgage rates and increasing real estate prices. Simply put, home equity sharing makes it possible for you to buy more home than you can afford today, by sharing the purchase of a home with an equity partner.

Typically, when you buy a home, you put some money down. The rest of the payment for the home is provided by a bank, from which you take out a mortgage. With equity sharing, part of the down payment is provided by an equity partner. Much like venture investors buy part of a startup in exchange for equity in that startup, equity partners buy part of your home in exchange for a piece of the equity. That means that if the value of your home increases, and you sell, the equity party takes part of the upside (relative to the amount of equity they own).

The devil is in the details of course. Depending on the arrangement, you may have to refinance or sell after a particular period of time, say three, five, or ten years. But there are many options available depending on the equity partner.

The most popular form of home equity sharing is with family members or close friends. This is because these people know you already and are probably more likely to be willing to be a partner in helping you buy a home than a stranger. The downside is that working with strangers may result in more of a formal business relationship, which could be better for you in the long-run. The down-side is that it is harder to find strangers who will want to partner with you to help you buy your home. However, there are now services on the Internet as well as commercial banks that will partner with you or help you find partners for an equity sharing arrangement.

Make sure you read the fine print whenever you enter into an agreement. Understand your obligations as well as those of the equity partner to find out if a home equity partnership arrangement is right for you.