New product review: Point.com, an alternative to a home equity loan or a HELOC
(Editor’s note: This is an article originally published 10/27/17. There is an updated article on Point available published on 2/24/19.)
Point is a new product for homeowners. It’s marketed as an alternative to home equity loans and HELOCs (home equity line of credit). For homeowners who want or need some extra money to pay off debts, do home improvements, etc., “Point buys a fraction of your property. There are no monthly payments.”
In summary: Point is a product that sounds good and simple – sell a piece of your home and get paid without having to pay interest – but there are real risks with having someone else own part of your home, including serious legal restrictions, and it appears that they discount the value of your home, making it not as good a deal as it first appears.
(This will be a long post, because in order to really understand what Point does, we do need to dive into the details. If you’d like to skip ahead to my recommendations, click here and it will take you to the bottom.)
Americans have $12 trillion dollars of home equity. A new type of product targets homeowner home equity.
How does it Point, exactly? According to their website:
- Point “buys a fraction of your property”
- In exchange, they pay you a certain amount of money
- You pay a number of fees – 3% of the money they give you is deducted for fees, plus various other fees
- You sign a Deed of Trust and Memorandum of Option that gives them some legal rights over your property that now they have a stake in (a “Deed of Trust” is where the legal title to your property is transferred to a trustee, which holds it in security for a debt. A “Memorandum of Option” can be a right to purchase your property.)
- You have to either sell your home within 10 years or they have the power to sell it for you (and possibly buy it from you?), unless you pay back the money they gave you ahead of time
- If you sell your home within the 10 year term then Point is automatically paid from escrow, based on how much you borrowed and how much your home appreciated
- If you don’t sell your home within the 10-year period, you can buy back Point’s stake at any time during the term at the then current appraised property value
- Point is paid a fraction of the home’s value. If the home has declined significantly in value, Point may be due less than its original investment.
Is this a better deal than a home equity loan or a HELOC? There really isn’t enough information on their site to say. Let’s dig a little deeper.
In recent news articles, Point was pitched as a product that was for homeowners who didn’t qualify for a home equity loan or HELOC. Any mention of subprime loans seem to be absent from the current version of their website, however.
Like any financial product, it is really important to know the best and worst case scenario of your options, before you decide whether it is for you or not.
Let’s look at different scenarios so we can get a sense of what best and worst case outcomes would be for a consumer who chooses Point.
This is a good example to use:
Sally has a home worth $400,000. She sells 10% of her home’s value to Point. In exchange, Point gives her $40,000. She owes $280,000 on her mortgage.
Scenario #1 Sally is going to sell her home before the 10 year term is up
1. What if Sally decides to keep her house for 10 years, it appreciates 20%, and she sells it?
According to the Point calculator, she will repay to Point $60,000. This value appears to be the original $40,000, plus 25% of the $80,000 in home appreciation.
2. What if Sally decides to keep her house for 1 year, the home does not appreciate, and she sells it?
According to the Point calculator, she will repay Point $40,000, the same amount that she got from Point.
3. What if Sally decides to keep her house for 1 year, and her home decreases in value?
I have no idea, based on the calculator, as the calculator does not let you run scenarios for if your home decreases in value.
However, there is a hint of what happens if a home loses value from this news article from Fast Company: “After appraising the house, Point adjust (sic) the value downward to make sure it still gets paid if the value of the house goes south.”
This Washington Post article says that when Point appraises your home, they adjust the appraisal down 15%.
If these news sources are accurate, assuming Point volunteered this information, then the outcome for Sally in the cases of 1, 2, and 3 above become much worse:
1. Sally’s home appreciated $80,000, but since Point gave it a 15% haircut when it gave her the 40,000, it was worth $340,000 instead of $400,000. If she owes Point 25% of the appreciation (now $140,000 instead of $80,000) then she owes $35,000 on top of the $40,000 for a total of $75,000 instead of the $60,000 I originally thought by using the calculator.
2. If she keeps her home for a year and it does not appreciate in value, because of the 15% haircut on her equity, her home appears to have appreciated $60,000 (even though it stayed the same) and she would owe 25% of that back, or, $15,000 plus the original $40,000, or $55,000, instead of the $40,000 I thought by using the calculator.
3. If she keeps the home for a year and her home decreases in value by, for example, 10%, then her home appears to have appreciated $20,000, since she got a 15% haircut originally on her home value, and she would owe 25% of that back, or, $5,000, plus the original $40,000, or, $45,000 instead of just the $40,000 initially given to her.
Now, what if, instead of selling her home before the 10 year term is up, she wants to keep her home and buy back the 10% stake that Point owns in her home? Let’s explore this scenario.
Scenario #2 Sally does not want to sell her home before the 10-year term is up
1. What if Sally’s home appreciates 20%?
No information is given on the Point site, except that on this page, it says that the amount is calculated based on an appraisal.
2. What if Sally’s home does not appreciate or depreciate but stays at the same value as when she got the money from Point?
Again, no information is given on the Point site, besides that the amount is calculated based on an appraisal.
3. What if Sally’s home decreases in value and she wants to pay back Point?
Like the two previous examples, little information is available on the site.
In the news, however, we find this from an article from Bloomberg:
“Those who decide not to sell their homes have to pay the company back at the end of the 10-year period, similar to a loan, with an annual effective interest rate that’s capped at about 15 percent.”
If this interest rate is accurate, if Sally wants to pay Point for the 10% stake in her home for which she got $40,000 and not sell her home in order to pay it back, she would owe the following at the end of each year, based on a 15% interest rate:
However, the FAQ on the site seems to contradict this:
“If you don’t want to sell the property, you can choose to do either of the following at ANY time during the term (without penalty):
• buy out Point based on the appraised fair-market-value of the home at that time
• finance out Point with a HELOC, home equity loan or reverse mortgage based on the appraised fair-market-value of the home at that time
If you don’t sell or pursue any of the other options mentioned above before the end of the term then you must repay Point when the end of the term is reached. In this scenario, the homeowner repays Point based on the appraised fair-market-value of the property at that time (i.e. at the end of the term).”
This seems to explicitly say there is not interest applied on the amount that you get from Point, and that the payback terms would be similar to the amount Point would get if you sold your home.
What it means to have someone “own a piece of your home.”
The Deed of Trust and Memorandum of Option that Point has you sign will most likely explain what it actually means for Point to own a piece of your home.
Since these documents don’t seem to be public, you’ll want to find out:
- Can you refinance your property during the 10-year term and are there any restrictions? It says on their site that you can refinance in order to pay back Point, but does not specify other reasons, but instead says “we evaluate all other subordination requests on a case-by-case basis”
- What happens if you fall behind in your mortgage payments?
- What happens if your home isn’t maintained at a certain standard?
- What if you want to take out another loan against other home equity? Point says there are “limits to adding on additional debt to the home”.
- Point mentions that you can rent your home out but that “a penalty is imposed at the end of your term if the property is not a rental at the beginning of the agreement”
- How much flexibility do you have on the sale price of your house? If you sell it, can you sell it for whatever you want, or do you have to only accept what they think it is worth? After all, you seem to be co-owners.
These details will be in the Deed of Trust and Memorandum of Option, or, in another paper that they will have you sign. My advice? Have a lawyer read it carefully. After all, what you sign has serious consequences on what you can do with what is often a homeowner’s largest asset, their home.
Here are my recommendations for people considering Point. As with any financial product, the devil is in the details!
Make sure that you fully understand:
- Point.com appears to discount the equity that you have in your home. How does this affect the amount of money that you owe Point later on?
- Make sure that you understand what your home equity is before you sell anyone a piece of your home equity. For most homeowners, most of their net worth is in their home equity!
- Is there any interest applied if you pay back the money that they give you instead of selling your property to recoup it? What exactly is it?
- What exactly do you agree to by signing the Deed of Trust and Memorandum of Option? Get a copy of these up front, and any other paperwork that you are required to sign before you go too far down the process. You need to know your rights should you need to get additional financing, miss a mortgage payment, need to rent out your property, or sell your house for any amount of money in the future. Don’t take a chance with your home. It’s too big an asset.
- It is imperative that you have a lawyer review these documents before signing them so that you fully understand the restrictions you’ll have on your home, such as, home financing options, missed mortgage payments, property condition, renting your property, and home sale.
- And, finally, after you have all this information, compare this financial product to others that are available, including cash out refinancing, home equity loans and HELOCs, in order to make an informed decision.