California-based startup gives cash to homeowners in return for a share of property’s equity
Bengaluru, India | Red Newswire | Dec 23, 2015 Last Updated at 7:15 AM IST.
Nicole Bennett, a California resident had a huge debt to pay off and so thought of pulling some cash out of her house. But being on low on credit score, she couldn’t get help from her mortgage lender Wells Fargo & Co. Then she turned to Point digital finance Inc. – a California-based startup that takes a stake in your property and gives you cash.
Thus, Bennett was able to pay off her debt with $40,000 she got. She said, “I have all this equity in my house but I couldn’t use it because of my credit score. I can breathe now because all my money isn’t going out the door.”
Point Digital is backed by Greylock Partners, Vikram Pandit (Former CEO of Citigroup Inc.) and Andreessen Horowitz.
While majority of the lenders cater to only credit-worthy borrowers, Point digital aims at people who have a low credit score and aren’t able to afford costly traditional loans.
Home prices dropped in 2012 and since then banks have put heavy limits on the amount that can be taken out by borrowers when refinancing. This resulted in tighter credit standards, HELOCs, high FICO scores for home equity.
HELOC is another kind of mortgage that has to be repaid monthly and that can be used in full or drawn by the homeowners as needed. The idea is to make equity investments which frees the customers from the obligation of paying back to the firm until the house is refinanced or sold.
Director of housing policy at Center for American Progress, Sarah Edelman says, “While it may be appealing to get an upfront lump sum of cash, the risk here appears to be that a consumer could end up with a more expensive product with harsher repayment terms than they would with a more conventional loan.”
Greg Mcbride, Senior Financial Analyst at Bankrate Inc. says, “The home-equity market is still very restrictive. It starts getting tougher below 680. Below 620 it is both really hard and really expensive.”
However, Point Digital adjusts the investment costs based upon you and your property. The riskier the customer, higher is the percentage of price appreciation. Also with Point, you can have credit scores as low as 620.
In case the homeowner isn’t able to pay Point, it can sell the home to recoup its portion of gains. For those who don’t want to sell their homes, have to pay back to Point by the end of a decade along with interest.
Eddie Lim, CEO of Point says, “If your home does well, we both do well. If your home doesn’t do that well, then this was one of the cheapest sources of financing that you could have obtained.”
The firm invests in properties which appear to be valuable. With initial focus on California, the firm plans to expand to other states by next year.