Frequently Asked Questions
EquityChoice is a smart alternative to traditional home equity loans, or equity investment programs, that allows homeowners access to the wealth locked in their home, especially for those who have recently refinanced at historically low mortgage rates. EquityChoice is a second mortgage that allows customers to keep their current primary mortgage terms intact and preserve the equity they’ve already built. We share in the outcome of the home price appreciation that occurs after you close on your Equity Choice loan, not before. It gives borrowers the choice of receiving cash from their equity at a below market interest rate plus sharing in a portion of the home’s future appreciation without having to liquidate portfolio investments, dip into savings, or experiencing the pressure of adding additional monthly mortgage payments. Like other mortgages, you are still required to pay property taxes, homeowner’s insurance, and maintain the home.
EquityChoice provides homeowners immediate access of up to 16% of their current home’s equity in cash – with loans up to $500,000 – in exchange for a fixed monthly interest rate that compounds monthly for the term of the loan plus a share in the home’s future appreciation. The shared appreciation may increase the effective annual percentage rate and overall cost of your loan.
This is dependent on how much your client chooses to borrow at the time they apply for the loan. The more they borrow, the more they share. Our Shared Appreciation amount is generally calculated as the loan-to-value ratio multiplied by three. For example, if your client chooses to receive 5% of the home’s value today, the shared appreciation percentage will be 15%. Choosing to receive less money now will result in a lower share:
5% LTV – 15% Home Appreciation Interest Share
10% LTV – 30% Home Appreciation Interest Share
15% LTV – 45% Home Appreciation Interest Share
Unlike other products that may operate without required limits or usury cap, EquityChoice as a mortgage product caps the amount one can owe. Furthermore, that amount is calculated using a rate that is just below the state/federal high-cost interest rate or annual percentage rate thresholds, as applicable in the state the property is located in, which can help preserve your clients hard-earned equity.
It’s simple. Our investment is longterm, on behalf of retirement plans and life insurance policy holders who don’t need or want access to their capital in the interim. We prefer that our money remains invested as long as possible. We offer EquityChoice to allow select customers, who are financially sound and responsible homeowners, access to capital without a fixed payment schedule.
While this is not meant to be a prequalification, at a minimum you must:
- be a homeowner with an existing first lien mortgage
- reside in the property as your primary residence for at least 2 years
- have sufficient equity, approximately 50% or greater, built in your home
- access to liquid reserves, assets, or income to satisfy the loan requirements
- have a FICO credit score of 680+ While the above is not a commitment to lend and is subject to change, it provides the minimum eligibility criteria when you are ready to apply for an EquityChoice loan.
Allowable sources include, but are not limited to, checking and savings accounts, retirement accounts (401k, IRAs, etc.), and non-liquid/ cash holdings (stocks, bonds, mutual funds). In addition, some business assets may also be considered.
The loan matures and must be repaid when you sell your home, after the specified term, whichever happens first or upon the occurrence of certain other events as defined in your promissory note. When the loan matures, you are required to make a final payment representing the total amount owed under the mortgage.
Yes. This is one of the many benefits of EquityChoice. You are in control of your equity and proceeds, which also includes paying down your loan at any time, without a pre-payment penalty.
Your client can access up to 16% of the home’s value (LTV) assuming the balance of the primary mortgage and the EquityChoice loan do not exceed 60-65% of the home value (CLTV). The actual amount however depends on the current value of the home, their overall financial situation, and how much they would like to receive at loan origination. At the time of application, your client can decide how much or how little they’d like to tap into within that range.
You can expect to pay an origination fee that is approximately 3% of the loan amount at closing and customary closing costs associated with a mortgage transaction. These costs can be financed into the loan. The out-of-pocket expenses you can expect to pay are for an appraisal and a property inspection, which are third-party fees and not lender costs.
Absolutely! They continue to live in the home that they love, using it as they see fit, so long as they remain the primary occupant. In addition, your client will keep all the tax advantages that come along with being a homeowner. Of course, just like any mortgage, they must continue to pay property taxes and insurance, and keep up with routine maintenance of the property. Also, like other mortgages, the home is security for the EquityChoice loan and we record a mortgage on your home.
They have the choice to use the loan proceeds however they want, with many EquityChoice customers leveraging these funds to diversify real estate or financial planning investments, start or invest in a business, replace high-cost lines of credit, renovate their home, fund college tuition, provide a down payment on another property, or consolidate high interest, unsecured debt.
Yes, they may still borrow the equity they have built in their home. When we close the EquityChoice loan, we will set a 1st lien debt limit that approximates the unpaid principal balance on the primary 1st lien mortgage. In the future, they can refinance the primary 1st lien mortgage as long as it doesn’t surpass the 1st lien debt limit. If they want to access proceeds greater than the 1st lien debt limit set, they can simply refinance and choose to pay off the EquityChoice loan.
Of course, they have the option to refinance their primary mortgage to reduce the interest rate. EquityChoice is a subordinate lien, secured by a mortgage on the property that is subordinate to the primary (1st lien) on the home. As is typical with any second mortgage, they will be required to pay a re-subordination fee to the servicer of the loan to keep the EquityChoice in place while simultaneously completing the rate refinance. Note that an EquityChoice loan may impact their ability to refinance their first lien mortgage depending on the lender’s underwriting criteria.
EquityChoice offers you access to funds at a significantly below-market interest rate, 4-8% pts. less than current rates of comparable home equity products*, without forcing you to give up the historically low rate you secured on your current
first mortgage. Best of all, without required monthly payments you have extra money to put towards other needs you have for your funds.
*Average based on internal analysis through 8/31/2023 of interest rates for home equity loans and home equity lines of credit.
As the industry’s pioneer of a residential shared appreciation mortgage, EquityChoice provides homeowners greater safeguards and potentially lower costs than equity sharing agreements. Like all other mortgage products, it is regulated and can only be originated by a licensed loan officer making it more predictable, secure, and controlled to protect all parties involved (the borrower, broker and lender).
As a mortgage, the state/federal high-cost interest rate or annual percentage rate thresholds set a capped amount of what you owe, unlike other products that may present unknown risks as their balance accrues. EquityChoice also protects the homeowner in the event your home depreciates at time of maturity. If the home is worth less than the Initial Agreed Value at payoff, you will not owe us any interest based upon Shared Appreciation. In that event, you would owe the negatively amortizing fixed interest rate component that has been accruing for the term of the loan at a rate that was set below the market of other second lien mortgage products at the time we closed your loan. If your home decreases in value, that presents a cost to us but not necessarily a loss to you.
How do you determine how much my client will owe using the appreciation or change in value of the home?
When your client applies for the EquityChoice loan, we use an independent 3rd party appraiser to estimate the value of the home (referred to as the Appraised Value). To account for market volatility and naturally occurring appraisal variance, the Appraised Value will be reduced by generally 5% to establish the home’s Initial Agreed Value which will be used as the starting point for calculating the future appreciation. In order to determine the amount of appreciation your client will owe at time of payment (partial prepayment or a Maturity Event), we look to the Index to calculate what we refer to as Indexed Shared Appreciation. Specifically, to calculate the Indexed Shared Appreciation we will:
- refer to the current Index value published for the Note Date at time of payment, which is the Initial Index
- compare the Initial Index to the most recently published Index value prior to payment date. This determines the Index Change Percentage
- multiply the Index Change Percentage by the Appraised Value, the result of which when added
to the Appraised Value, is the Indexed Value of the home
- subtract the Appraised Value from the Indexed Value, then multiply that by the HAIS (Home Appreciation Interest Share). That result is finally multiplied by the outstanding principal balance at the time of payment divided by
the original principal balance to reach the Indexed Shared Appreciation amount
Indexed Shared Appreciation = ((Indexed Value – Initial Agreed Value) * (Home Appreciation Interest Share)) * (Outstanding Balance/Original Principal Balance)
Always remember, the Indexed Shared Appreciation may increase the overall cost of the loan above the fixed interest rate. However, the total interest will never exceed the capped amount that is just below the state/federal high-cost interest rate or annual percentage rate.
While your client may use the loan proceeds from your EquityChoice mortgage to invest in a new property, they cannot use it as the 1st lien on a new home. This is because EquityChoice is a 2nd lien on the primary residence, and part of the requirements includes owner occupancy. In other words, EquityChoice offers your client the opportunity to refinance an existing property with a mortgage; but, it cannot be used as the primary mortgage for the down payment when purchasing a new home.
We understand that some homeowners may have no mortgage on their home whatsoever. We’re exploring additional new and innovative ways to ensure all your client’s home financing needs are met. Check newfi.com/equitychoicews to stay up to date with upcoming product releases.
Unlike other shared equity options, significant improvements or modifications the homeowners make to the home will not impact the amount they owe of Shared Appreciation. Instead, all calculations of appreciation are based solely upon movements in the Index, which tracks property values generally in the geographic region where the property is located.
This means that the value for the individual home may have appreciated more (or less) than the amounts indicated by the Index for homes in the area. Further, capital improvements to the home (or conversely, any deferred maintenance) will not be considered in determining the amount of the Indexed Shared Appreciation.
EquityChoice mortgages require no payments until maturity. However, if they fall behind on their mortgage in 1st position, the lender may follow through with any proceedings, such as foreclosure, to settle the debt. The EquityChoice
lender will participate in those proceedings if they are seriously behind on payments. The same is true if you default on EquityChoice, including when making the payment due at its maturity.
A borrower who takes pride in homeownership, maintains their homes physical condition, intends to remain in their home for an extended period, and appreciates the freedom to use the loan proceeds to remodel their home, enhance their lifestyle, fund their small business, or use the loan proceeds to invest in income-producing rental properties, limited partnerships, or portfolios of listed equity securities.
- new homeowner (purchased your primary residence less than 2 years ago)
- have less than 50% equity in your home
- own your home outright, with no 1st lien or current mortgage
- short-term real-estate investor (flipper)
- intend to sell or move within the next 5 years
- have a below 680 FICO Score
EquityChoice can be a smart alternative to high cost, small business lines of credit or debt factoring options. Clients may find it to be an attractive alternative to certain limited maturity SBA loans that require a personal guarantee which includes the home equity even though the proceeds fund the business. Plus, since your clients aren’t required to make any payments until maturity, EquityChoice can be used to significantly increase their monthly cash flow.
Since they don’t have to make monthly payments on EquityChoice until the end of the loan term, some may find that it’s to their economic advantage to reinvest the proceeds in income producing rental real estate or portfolio growth of dividend producing listed equity securities. Other investments where they can turn time into an advantage – the time when they don’t owe principal or interest but receive investment income – might be appropriate as well.
How do I seek help in determining if EquityChoice is an appropriate alternative to a small business financing arrangement or suitable for reinvestment in something other than the primary residence?
We recommend that you, and your client, discuss the appropriateness of EquityChoice with a Financial Advisor, Business Consultant, and/or Tax Accountant. They can explain the steps your client may need to take and how they might take advantage of the tax laws that allow them to recharacterize the 1098 interest deduction as current business or investment interest expense.
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