Accessing Home Equity for Financial Alternatives
My wife and I own a lake-front house, and we love spending time there. However, our two adult children rarely enjoy it for a variety of reasons. I am sure they will sell it when they inherit the house. The house has no mortgage and during the pandemic, like so many vacation homes, the value of the home grew significantly. Will that growth trajectory continue? The house is currently worth approximately $1.5MM and we would pay hefty capital gains taxes if we sold it for cash to reinvest in other investments or financial products.
CONSIDER A NUMBER OF WHAT IF’S:
WHAT IF we could, instead, take $500,000 of value in that home and invest it in a managed account that will outperform the historical growth of the property? A comparison from 1945 to the present day shows that the normalized historical returns of the Case Schiller Home Price Index was 4.87% versus 11.07% for the S&P 500. Sounds like good arbitrage to me!
WHAT IF we could arrange for our children to receive a $2.9MM income and estate tax-free payment PLUS their share of the home’s remaining equity value at our death by taking the $500,000 of equity out of the house today? I am referencing a single premium Survivorship Life (Second-to-Die) Insurance policy. At life expectancy (ages 89/84) the insurance alone is a 7% tax-free return.
WHAT IF we could turn that $500,000 into a guaranteed income stream by purchasing an immediate income annuity to supplement retirement income?
WHAT IF we could create a longevity hedge via the purchase of a deferred income annuity with payments starting at a future date?
WHAT IF we could purchase guaranteed long-term care benefits, or a combination of life insurance with long-term care benefits, or an annuity with long-term care benefits?
The planning options to use dormant equity in a primary or secondary home are endless.
This is NOT a Reverse Mortgage conversation; this is a totally new offering that many of our readers have never heard of. More later.
According to a 2024 Board of Governors of the Federal Reserve report, there is $31 trillion sitting in home equity in the United States which represents a significant percentage of overall household net worth across all ages.
This brings us to a new financial product that focuses on this unused home equity asset.
Introducing Converting Home Equity Into Financial Success or CHEIFS offered by Cornerstone Financing, an insurance and investment funding company. CHEIFS presents a huge opportunity for financial advisors to have a NEW AND DIFFERENT conversation with clients about using their dormant home equity to achieve meaningful financial planning results. It also provides financial advisors with a unique product that enhances their toolkit!
As I said before, this is NOT a reverse mortgage. CHEIFS is structured as a minority fractional investment in residential real estate requiring NO interest or principal payments. There is no personal liability for payment of the homeowner’s obligations under the agreement (non-recourse). This allows the homeowner to continue to live in and\or enjoy their home without the burden of monthly payments, using the equity taken to purchase financial products resulting in a more holistic financial plan. It provides access to tax-free cash with no debt service requirement, resulting in a highly efficient cost of capital. The homeowner continues to enjoy all utility benefits of homeownership, remaining completely in control while sharing some of the economic benefits with Cornerstone.
In a Point Research survey in April 2023, when asked the primary reason homeowners won’t use a loan (like a reverse mortgage, cash-out refinance, or a home equity line of credit) to pay for home updates, the primary reason, 38.9% of respondents, was “I want to be debt free”.
A CHEIFS transaction is an equity participation in the property based on a predetermined formula, with a cap on the equity percentage.
Conversely, a reverse mortgage is a loan in which borrowed money PLUS interest PLUS fees each month create a rising loan balance. The homeowner or their heirs will eventually have to pay back the loan, usually by selling the home, and often, little to no equity remains to share with the heirs.
The market for Home Equity Investments has exploded, as noted by head of securitized products at Barclays Bank, Mark Ginsberg.
An October 30th WSJ article stated that “private equity giant, Blackstone, began spending hundreds of millions of dollars on family homes that went into foreclosure after the 2008-2009 financial crisis, creating a completely new asset class for institutional investors”.
Cornerstone Financing, the developer of CHEIFS, recently announced that they had secured $285 million in aggregate financing through global finance firms Aquiline Capital Partners LP and Nomura.
The press release goes on to state that “a new funding solution for insurance and financial advisors revolutionizes the home equity landscape by augmenting the evolving financial toolkit for advisors and homeowners”.
CHEIFS is currently approved to do business in Pennsylvania, California, Arizona, Florida and Virginia with more states to follow.
Imagine a planning process that releases dormant home equity for use in investment and protection solutions without monthly payment or debt. Imagine a planning process where required cash is readily available, leaving fee-generating AUM intact, existing cash on hand and liquidity remains in place. Imagine a planning process where the funding conflict or challenge often presented when trying to purchase insurance and annuity products is eliminated. This is CHEIFS! Imagine what it can do for your customers and your advisory practice.
AgencyONE is planning a webinar in the coming weeks with the creators of CHEIF, during which we will explore this unique program in further detail. Watch your email for the invitation!
Please contact AgencyONE at 301.803.7500 for more information about CHEIFS or to discuss a case.
