Why spend on a home down payment when Point or Unison will do it for you?
A company called Point just gives you a home down payment. And last week, venture capitalists upped Point’s funding to a whopping $265 million.
With such large money behind the down payment assistance idea, it must be good for you, right? Let’s dig in, starting with a question about this new “sharing economy” we all live in.
WHY WOULD YOU ACTUALLY BUY A HOME?
You summon rides when you need a car, and stream songs and movies/TV when you need entertainment. Who owns stuff any more except for old-timers?
But the argument is different for buying a home because you don’t just need a place to live. It’s also your largest investment—and one secret of home investing is something called leverage.
Imagine you buy a $300,000 home with a 10% down payment, which is an initial investment of $30,000. When that home’s value appreciates, you don’t just get the appreciation on the $30,000 like you would with a stock. You get the appreciation on the full $300,000.
So if your $300,000 home gains 4% in value next year, you gain $12,000 in value. If you put $30,000 into the stock market and it grew 4%, you’d only gain $1,200.
After 5 years of 4% annual appreciation, your $300,000 home would be worth $365,000 (or $364,996 to be exact).
After 5 years at this same rate of appreciation, your $30,000 stock investment is worth $36,499.
There’s more cost and tax nuance to this comparison. But in a nutshell, this is how leverage benefits you as a homebuyer. You earn returns on a much higher amount of money than just the cash you put in.
These economics have generally benefitted long-term homeowners for decades.
BUT NOW HOME DOWN PAYMENT & OWNERSHIP CAN BE SHARED LIKE CARS, MUSIC, TV
Companies like Point and Unison help with your home down payment to keep your monthly costs down in exchange for a piece of that leverage.
They’ll front about half the down payment at zero interest. But you share about one-third of your home’s appreciation with them for the first 10 years.
You can pay off their share of the appreciation anytime during this 10 year window.
Here’s the math:
Remember our example where you buy a $300,000 home with 10% down ($30,000) and the home appreciates to $365,000 after 5 years?
If you had Point add $30,000 to your down payment, Point would get $22,000* of the $65,000 home appreciation after 5 years. This is about one-third of the appreciation.
So in our 5-year example, you’d pay them $52,000 after 5 years. Of this, $22,000 is their share of the appreciation, and $30,000 repays the 10% down payment contribution they made.
And the other $43,000 of your home’s $65,000 gain in value is yours.
SO IS HOME DOWN PAYMENT HELP WORTH IT TO YOU?
The answer: it’s about $87 per month more to use Point if you repay their share of appreciation after 5 years. But your monthly cost along the way is $280 cheaper.
Here’s the math:
With Point’s help, they add 10% ($30,000) to your 10% ($30,000) down payment. So you put 20% down instead of 10%, avoid mortgage insurance, and your total monthly housing cost is $1554.**
Without Point’s help, you make your 10% down payment of $30,000. And your total monthly housing cost including mortgage insurance is $1834.**
This means your total monthly housing cost is $280 cheaper using Point.
BUT … Point gets $22,000 if you buy them out at the end of 5 years, which equates to $367 per month.
DOES SHARING APPRECIATION PUT YOU AHEAD?
If you did buy out Point after five years, there’s still $43,000 in home appreciation that’s yours. And your monthly cost was $280 cheaper along the way.
This math doesn’t include all the fine print comparing all fees, closing costs, and tax calculations for home buying on your own vs. partnering with companies like Point and Unison.
But it includes enough math to tell you something important. Companies like Point and Unison let you conserve home down payment and monthly cost cash without losing out on the secret of leverage when investing in a home.
This is handy for people early in their careers whose incomes will grow. Then they can buy out of the shared appreciation pretty quick.
It’s also useful for folks whose incomes are pretty fixed, but don’t want to lose out on the benefit of home appreciation.
Ironically, this product to simplify your life is pretty technical, but hope this helps you figure it out.
Hit us up if you have questions.
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Reference:
– Homeownership investment company Point raises $122 million (HousingWire)
– *Modeled using Point’s shared appreciation calculator. *Point’s share of equity is 20%, but their initial calculation of value isn’t the home’s $300,000 purchase price. It’s purchase price minus 20%, which is $255,000. They do this to compensate themselves for the risk they’re taking. So applying their formula to our scenario of the home growing in value by 4%-per-year, the home ends up worth $365,000, which is $110,000 more than Point’s $255,000 initial value calc. They get 20% of this which is $22,000, and they also get reimbursed for their initial $30,000 investment, for a total of $52,000 to them. That means that you get $43,000 of the $65,000 in appreciation during that time.
– **With 20% down and 4.25% 30-year fixed mortgage, total monthly cost is $1554, which is $1181 mortgage, $268 taxes, and $105 insurance—this means you’ll spend $123,240 after 5 years. With 10% down and 4.25% mortgage, total monthly cost is $1834, which is $1328 mortgage, $268 taxes, $105 insurance, and $133 mortgage insurance.