My Equity Freedom: Risking Your Equityby Tim Manni
A relatively new kid on the block in terms of mortgage loan programs, My Equity Freedom (MEF) is an unconventional twist on a home equity loan.
Developed by mortgage vet Anthony Hsieh, formally of Lending Tree, MEF allows homeowners to borrow a percentage of their home’s value in one tax-free, lump sum. The loan requires no payments for between 5-50 years. At the end of the term, or when the owner sells the home, the loan becomes due – including the amount borrowed — plus typically 50% of the home’s appreciation from the time the MEF was issued. There is a penalty for paying back the loan in less than five years.
In today’s unstable housing market where lenders are issuing fewer home equity loans, MEF loans are appealing, offering borrowers one large lump sum and no structured payments. A MEF loan can be a worthwhile investment for homeowners who choose to invest their borrowed money in say a business, rather than spending it on a boat.
HSH Vice President Keith Gumbinger warns against these types of loans for the simple fact that borrowers will never have a clear picture of their debt or equity. For example, with a fixed-rate mortgage, a homeowner can easily and clearly calculate their payments, mapping out their amount of debt and interest cost. Although borrowers are committing nothing against their monthly income, with a MEF they run the risk of depleting their home’s equity.
Rex and Co. and Equity Key are other companies that offer a similar product. When the housing bubble pops and begins to turn around, MEF my not look as good to borrowers. Hsieh says he’s less interested in the nature of the borrower than he is in the value of the home.