Anyone who thinks home loans all work the same way hasn’t checked out Unison.
This San Francisco start-up has grown quickly over the past few years precisely because it offers a different approach to lending.
Unison HomeBuyer will lend you a 10 percent down payment for your new home, and you won’t have to pay interest or even make payments on the loan.
How is this possible?
Rather than charging interest and collecting payments, Unison will become a part owner of your home.
The company calls this concept co-investing. It may or may not be a good deal for you, but it definitely is intriguing.
Unison HomeBuyer Review: How Co-Investing Works
Unison’s intuitive website describes its lending as a win-win:
- The Money: You get the cash you need for a down payment or to increase the size of your down payment.
- No Payments: You don’t have to pay back the money in the traditional sense of making regular payments and being charged an interest rate on your balance.
- Shared Ownership: Unison owns a portion of the equity in your home. As your home grows in value, Unison’s share grows with it. If your home loses value, Unison’s share decreases.
- Repayment: When you sell the home, or after 30 years pass, you’ll buy out Unison’s share in your equity and you’ll repay the loan’s principal.
Unison will be part-owner of your home, but like any other lender, the company will not have occupancy rights or any responsibility for maintaining your home.
Typically, Unison will not be your primary lender.
You’ll still need a mortgage loan to pay for the majority of your home’s purchase.
Unison HomeBuyer Advantages
Borrowing from Unison can offer several advantages:
- Extending Buying Power: Since the money Unison lends you doesn’t require a monthly payment, you can extend your borrowing power without committing to a larger monthly payment.
- Speeding Up the Process: Saving for a down payment may take several years or more, especially in high value markets like San Francisco or New York City. Unison can cut years off your saving time by providing part of your down payment up front.
- Avoiding PMI: Mortgage lenders require you to buy private mortgage insurance if you borrow 80 percent or more of the home’s value. A loan from Unison lets you put more money down, potentially avoiding PMI which protects the lender, not the buyer.
Let’s look at these advantages more closely so you can decide whether they’re worth the cost of sharing home ownership with Unison.
Extending Your Buying Power
To keep things simple we’ll use a $250,000 house in the following examples. A 10 percent down payment would equal $25,000.
With 10 percent down, your payments on a 30-year fixed mortgage at 4 percent interest would equal $1,074. (None of the payments quoted in this post include property taxes, homeowners insurance, or home ownership association dues.)
If Unison kicked in another $25,000 for you to put down, you’d reduce your monthly mortgage payment to $955, saving $119 a month and $1,428 a year.
|Without Unison||With Unison|
Speeding Up the Process
This one doesn’t need much more explanation. Saving money takes time, especially when you’re paying rent and other bills.
A loan from Unison can help you buy a home sooner by reducing your reliance on your ability to save. Since real estate prices rise 3 percent a year on average, buying sooner can mean you’re buying for less.
Private Mortgage Insurance can cost up to 1 percent of your loan each year. On our $250,000 house on which you put 10 percent down, PMI would cost about $188 a month or $2,250 a year.
You have to pay those premiums, but they protect your lender in case you default on the loan. A loan from Unison that helps you put 20 percent down instead of 10 percent down, you can avoid PMI altogether.
Veterans should keep in mind that loans through the Department of Veterans Affairs do not require PMI.
The Costs of Unison Co-Investing
Unison appeals to home buyers because the lender supplies much-needed money upfront without the burden of a monthly payment and interest charges.
But before sharing your home’s equity with a lender, you should take a few minutes to consider what sharing equity means and how much it can cost.
The Value of Unison’s Share
The most important question should be: How much equity will Unison own?
Unison’s terms can differ from state to state and even from address to address in the same neighborhood.
On average, the lender will claim 35 percent of your home’s equity in exchange for putting down 10 percent on your house.
What does this mean?
Let’s go back to our $250,000 house from the examples above. With $25,000 down from Unison and your own $25,000 down, you’d have $50,000 in equity on the house before making the first payment.
Unison would own $17,500, or 35 percent, of this $50,000 in equity. You’d own the other $32,500 or 65 percent.
Buying Out Unison’s Share
As you make payments on your mortgage loan, and as your home increases in value, your home’s equity will become larger.
For this example let’s assume your house increases 3 percent in value each year and that you pay your mortgage each month on schedule.
|Time||Unison's Share||Your Share|
In 30 years, your $250,000 house would be worth $382,000 based on an annual increase of 3 percent.
At that point, you’d owe Unison $133,700 to buy out its 35 percent stake in your home’s value.
That’s quite a payoff for Unison considering it loaned you only $25,000 originally.
And, on top of buying out Unison’s share, you’d still owe the lender the $25,000 principal you borrowed originally.
For a traditional loan to pay off this much, Unison would have to charge about 17.8 percent interest which is astronomically higher than a typical mortgage rate.
For best results, a homeowner who borrowed from Unison should buy out the lender’s share as soon as possible. Unison requires borrowers to keep the loan for at least three years.
What If Your Home Loses Value?
Real estate markets vary widely. We used 3 percent as an average gain in our example above, but the housing market grows faster in some cities and slower in others.
It’s possible, of course, for your home to lose value. If it does, Unison’s share of your home’s equity will lose value, too.
The company will not accept losses resulting from your failure to maintain the home. Likewise, it won’t claim gains resulting from your remodeling projects. You’ll need to keep good records to document your improvements.
Regardless of the changes in your home’s equity, Unison will always reclaim its principal loan amount. And, the company currently operates in only 30 states and won’t lend money on a home it expects to lose value.
Other Costs to Use Unison
In addition to claiming a stake in your home’s equity, Unison will also charge a 2.5 percent loan origination fee which it assess up front.
For a $25,000 loan, you’d pay $625.
Not every mortgage lender works with Unison. If you’d like to borrow from Unison, check with your mortgage lender, or check with Unison for its list of approved lenders.
Best Ways to Use Unison
Co-investing with Unison can strengthen your buying power without adding to your monthly bills. But the actual costs can be staggering if your home grows in value before you buy back Unison’s share of your equity.
To limit your losses, try to buy out Unison’s equity as soon as you can. Ideally you’d buy Unison out after your third year of home ownership. The lender won’t allow a buyout any sooner.
This way you could avoid paying PMI without having to save up the entire 20 percent down payment.
Remember, though: For a $250,000 home, PMI will be about $2,250 a year or $6,750 for three years.
In exchange for avoiding $6,750 in PMI premiums, Unison could own $26,600 in equity in your $250,000 home.
Even if your house does not grow in value in three years, Unison would still own $17,500 of your equity.
You may do better to simply pay PMI until you get the loan paid down to 80 percent of your home’s value.
Alternatives to Unison
If you’re struggling to save money for a down payment but would prefer not to grant Unison or another company a significant portion of your home’s equity, consider:
- A subsidized loan such as an FHA or USDA loan which requires a lower down payment.
- Veterans can get a VA loan with no down payment and no PMI premiums required.