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Many homeowners have home equity built up which they wish they could access, whether for an investment property, a new business venture or even a cruise to the Bahamas.

Unfortunately, home equity loans are expensive and—thanks to increasingly strict credit standards—difficult to secure. The thought of paying interest on a new loan and adding yet another bill to the stack keeps most homeowners from utilizing home equity. However, there are ways to access home equity, debt-free and interest-free.

How it works
 
Under debt-free home equity financing, homeowners share the future increase or decrease of the value of a home with third-party investors (program sponsors). The homeowner decides what percentage of the future value of the home is to be shared with the program sponsors. In return, the homeowner receives that same percentage of the home’s current value in two payments: an up-front cash payment of up to 13% and a second payment of the remainder paid at the time the home is sold or the agreement is terminated.

Example 1:
 
A home is worth $100,000 and the homeowner agrees to receive 25% of the home’s current value ($25,000) in exchange for 25% of the home’s future value. The owner qualifies for 10% in up-front cash and receives a check for $10,000. There are no monthly payments and no interest charges on this money. Seven years later, the home is valued and sold for $150,000. The equity sponsors pay the remainder of the 25% owed at the execution of the agreement, which is $15,000 ($25,000 less the $10,000 cash up-front). Per the agreement, the owners pay the program sponsors 25% of the home’s value at the time of sale or termination of the agreement: 25% of $150,000 = $37,500.
 
After the sale of the house, including the two payments from the finance sponsors, the homeowners walk away with $137,500. This is not only a profit of $27,500 at the sale of the home, but $10,000 was made available in cash seven years before the sale without any monthly payments or interest charges.

Example 2:

 A home is valued at $750,000 and the homeowner agrees to receive 35% of the home’s current value ($262,500) in exchange for 35% of the home’s future value. The owner qualifies for 13% in up-front cash and receives a check for $97,500. There are no monthly payments and no interest charges on this money. Ten years later, the home is valued and sold for $650,000, a decline in value by $100,000. Should the program sponsors choose to exercise their option, they will pay the remainder of the 35% owed at the execution of the agreement, which is $165,000 ($262,000 less the $97,500 cash up-front). Per the agreement, the owners pay the sponsors 35% of the home’s value at the time of sale or termination of the agreement: 35% of $650,000 = $227,500.
 
After the sale of the house, including the two payments from the finance sponsors, the homeowners walk away with $688,000, which is more than they would have made if they had sold the house without sharing any of the gain or loss through this type of home equity financing. In addition, $97,500 was made available in cash ten years before the sale without any monthly payments or interest charges.

Should the equity sponsor choose not to exercise the option, the homeowner is still able to keep the $97,500 in up-front cash without having to share 35% of the sale price. In both of these scenarios, the homeowner ends up with more cash than they would have had they not used this home equity option.

Tapping the debt-free equity in one’s home for cash could be the answer to the financial needs of many homeowners. And, since the money can be used for any purpose the homeowner chooses, it’s up to them whether they choose to use the funds for business or pleasure.

David Nilssen is the CEO of Guidant Financial Group, Inc. Guidant Financial is a leading provider of self-directed IRA services and small business financing solutions.

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