One of the most common ways in which Americans build wealth is through the equity in their homes. According to Janet Yellen, "Home equity accounts for the lion's share of wealth for most families." In fact, the desire to build equity is one of the main reasons individuals and families buy their homes rather than continue to rent.
So what is "equity"?
"Equity" or "home equity" generally refers to the portion of the total value of a home that's owned by the homeowner, excluding the balance that's owed on any mortgages or loans secured by the property. For example, imagine you buy a home for $400k with a traditional mortgage. You're likely going to make a 10% down payment ($40k) and take out a $360k mortgage. Upon closing, your equity in the home will be worth $40k.
Now what happens to equity over time with a mortgage?
The value of your equity can go up or down, based on a) the market value of your home and b) how much of that value you own vs how much you owe to your mortgage lender. So let's look at a couple of scenarios:
- Scenario 1 - Home prices stay flat: Let's assume that after 5 years of living in your home, your home is still worth $400k. This assumes that the overall real estate market stayed flat and you have kept up with maintenance and repairs, so your home has neither gained nor lost value. During those 5 years, you will have made mortgage payments totaling ~$137k (at 6.5% interest) and ~$23k of that amount would have paid down the principal amount you owe to your mortgage lender, reducing the mortgage balance from $360k to $337k. So your equity in your home would have increased from $40k to $63k ($400k home value minus the mortgage balance of $337k) over 5 years.
- Scenario 2 - Home prices increase by 4% each year: Let's assume the value of your home increases by 4% every year (roughly the long-run average in the US) and you keep up maintenance and repairs like the prior example. At the end of 5 years, your home would be worth ~$487k and you owe $337k to your mortgage lender. In this case, your equity would be worth ~$150k ($487k - $337k).
- Scenario 3 - Home prices fall by -4% each year: In this scenario, your home would be worth $326k after 5 years. You would again owe $337k to your mortgage lender, so your equity would actually be -$11k, or a loss of $51k over 5 years. This scenario is called "negative equity" or "being underwater on your mortgage". This is a very real risk, especially for first-time homebuyers. Between 2008-2011, about 23% of home owners nationwide and up to half of homeowners in some markets in Southern California and Florida were "underwater" - (i.e. they owed more mortgage debt than their homes were worth).
How does "Evergreen Equity'' work?
In order to protect our customers from situations where they are "underwater" with negative equity, we created our evergreen equity protection. Because Ownify customers buy their home through a fractional ownership program, there is no debt involved. Without a mortgage balance, the risk of negative equity doesn't exist. So let's revisit the three scenarios above through the lens of an Ownify fractional ownership program:
- Scenario 1 - Home prices stay flat: Let's assume that after 5 years of living in your home, your home is still worth $400k. With Ownify, you would have bought 2% of the home's equity to start ($8k) and made fixed monthly payments to build up $43k of equity after five years. Your equity would have increased by $35k over 5 years.
- Scenario 2 - Home prices increase by 4% per year: At the end of 5 years, your home would be worth ~$487k. You would have made $43k in equity purchases over 5 years in the Ownify program (similar to scenario 1). However, because you're benefiting from home price appreciation, the value of those contributions will have grown to $47k. So in this case, your equity grows $39k over 5 years.
- Scenario 3 - Home prices fall by -4% per year: In this scenario, your home would again be worth $326k after 5 years. Your equity purchases under the Ownify program would have totaled $43k over 5 years (same as scenarios 1 and 2). Because your home lost in value, your share of the equity in that home also lost value and would be worth $38k at the end of 5 years. However, because you don't owe any mortgage balance on your home, you still have positive equity. In fact, your equity in this scenario increased by $30k over 5 years while the equity of a mortgage borrower in the same scenario would have decreased by $51k, a difference of $81k.
Our fractional ownership program makes it impossible for homebuyers to be underwater. We call this "Evergreen Equity" and it significantly reduces the risk of homeownership, especially for first-time homebuyers.
It's ok if this is confusing at first and sounds too good to be true. Fractional ownership is a new and exciting path to homeownership but there is a learning curve. We're committed to providing complete transparency to how our program works. Here are some ways to learn more:
If you're ready to get pre-qualified then apply now here.
If you would like a quick check on your eligibility for Ownify, use our tool here.
©2023 Ownify, Inc. All rights reserved. Frank Rohde is CEO and Founder of Ownify, Inc.