The dreaded PMI. Private mortgage insurance. Can we all agree that it stinks?
I remember when I was considering buying my first home – after some initial research with my personal finance blogging peers – it became apparent that I needed to do everything in my power to avoid PMI.
After buckling down and saving up 20% I was able to make it happen. But I’m in Texas. Where salaries are high and property values are low (well, at least they were back when I was buying).
For folks in really expensive real estate markets (San Francisco / New York), avoiding PMI can be tough. It’s also painful for anyone to be giving up so much cash upfront (when it could be invested or used in different ways). Leave it up to Silicon Valley to come up with a new, creative solution to this problem.
Today I’m going to review the company called Unison that is taking on this challenge. Let’s look at what they’ve created, along with the pros and cons.
What is Unison?
Formerly known as FirstREX, San Francisco-based Unison aims to help more people afford to buy a home. Rather than giving you a loan, they invest alongside you in your home by matching up to half of your down payment.
Unison calls this a “home ownership investment” program. Unison’s money is not debt and you don’t pay Unison interest. Instead, the company receives a share of the future change in the home’s price, while the homeowner keeps all the equity they build with their monthly payments. Click to reveal more about Unison…show
Advantages of Unison
Now that you know a little bit about the problem that Unison is trying to solve, I’ll outline some of the positives that I see.
1. You can avoid PMI.
I mentioned PMI in the introduction, but in case you don’t remember, PMI stands for private mortgage insurance. Many lending programs require PMI if the down payment is less than 20% as an insurance policy against the risk of you defaulting on your loan.
PMI is calculated as a portion of your loan amount, so the higher your loan amount, the more you pay. It usually costs around 1% of your loan amount on an annual basis, which could break down to thousands of dollars a year. Being able to forgo paying these fees can potentially be a huge cost savings.
2. You can lower your monthly mortgage payments.
Usually the down payment and the monthly mortgage payments have an inverse relationship — generally, the more you put down, the lower the monthly payments. By using the funds provided by Unison to help with the down payment, you are lowering your payments every month.
This can greatly enhance the affordability of a home for those who are worried about making enough money to cover the monthly payments.
3. You can hold onto some of your cash.
Some people have enough cash for a full 20% down payment but they don’t want to sink all their money into the home. Instead, they might rather use that money to make other investments or cover other expenses, such as a child’s education. By partnering with Unison, a home buyer in this situation can get many of the benefits of a 20% down payment while preserving their cash for another purpose.
4. Unison is promoting a responsible home-buying environment.
Unison views the home buyers they work with not just as customers but as partners. According to an article in the LA Times, prospective customers not only speak with a Unison representative but also take a quiz to make sure they fully understand how the program works prior to signing the agreement.
The real estate industry is notoriously complex, so the fact that Unison jumps through extra hoops to make sure potential buyers understand what they’re signing up for is a huge step in the right direction.
Disadvantages of Unison
While Unison can solve a painful problem for many would-be homebuyers today, there are still some things to be cautious of before signing up.
1. If the value of your home rises considerably, you could pay more than with PMI.
Since Unison shares in the appreciation of your home, choosing the Unison HomeBuyer program could mean that you pay more in the long run than you would have paid otherwise.
However, you will still benefit from a lower monthly payment along the way. And remember, Unison shares in the downside too, so if your home does not increase in value, or if it decreases in value, you will most likely be far better off with Unison than if you had used debt financing.
2. If you sell your home in the first 3 years, Unison won’t share any losses with you.
Unison only shares losses with the homeowner if the home is sold at least 3 years after purchase. This is because the company’s down payment funding is not meant as short-term home financing. This can be a disadvantage to someone that intends to remain in the home for a short period of time, but for anyone that expects to be in the home for more than 3 years, this should not matter.
So how does Unison make money?
Simple. They make money when your home appreciates in value over time — and they share that appreciation with you, as described above.
They also charge a transaction fee of 3.9% of the amount invested. Based on closing cost rates in your area, this could replicate “closing costs”. For Unison, this money most likely helps cover operational costs of processing your application and investment while they take the risk on your home appreciating over time.
Unison doesn’t need every home to increase in value. Instead, the company and its investors are looking for diversified exposure to the U.S. residential real estate market as a whole. They get that by investing in many different homes across the country, which balances out the volatility inherent in a single home’s value and decreases the risk they take on. In other words, it is a way for investors to gain exposure to the appreciation of home prices without needing to purchase the entire home.
In some cases where the home appreciates significantly, Unison could make more money than a traditional lender would have collected in interest and financing fees. But of course, that’s contingent on the home selling or appraising at a higher value than the original purchase price.
You can buy Unison out after 3 years. In the Unison HomeBuyer Program Guide, it says that the company allows you to buy out Unison’s investment once you have owned the property for a minimum of 3 years. You don’t need to sell the home in order for this to occur — it would be known as a “Special Termination” and an independent home appraiser would come out to appraise the home for its current market value.
The buyout payment to Unison would equal the amount of Unison’s original investment plus any profit that Unison would have made if you sold the home for the appraised value. The minimum payment to Unison on a buyout is its original investment – in other words, while Unison shares in losses when you sell your home, with a buyout, Unison does not share in losses.
Unison can also provide half of a 25% down payment, but they then ask for 43.75% of the change in value. Unison is willing to put up a little more money in exchange for a little more return in the end.
The home is 100% yours. This means you are still 100% on the hook for maintenance, repairs, and anything else that comes up during the process of owning the home. As part of the agreement, you are responsible for maintaining the home in good condition.
It is not free money. It may feel like you are getting something for nothing — especially at the beginning. And although you will not be paying any ongoing fees, you will owe Unison a significant chunk of money if your home rises in value.
The program that Unison has rolled out is unique. So the alternative solutions, in this case, may seem more traditional in contrast. I will outline a few of them below:
- Put less than 20% down and pay PMI. Though paying PMI is a pain, if the loan lets it drop off after you reach 78% LTV, then you’re not stuck with it for the duration of the loan. In most cases, if you use a 10% down payment, you’ll pay PMI for around 7 years.
- Buy less home or wait to buy until you have 20%. There are many compromises that can be made. For instance, buy a home in a neighborhood that is a little farther from town but has all the upgrades you’re looking for. Or, just wait longer to buy until you have the 20% saved up.
- Ask family for help. Many lenders allow family to gift you money for the down payment as long as a gift letter is written stating that it is a gift and not a loan.
Who is Unison for?
In my opinion, Unison is for the financially responsible homebuyer who was on track to save the 20% down payment until they found out there was a faster way to get into the home they wanted.
Had Unison not come along, they would have reached the 20% mark in another year or two. They plan to live in the home for the foreseeable future and aren’t looking at Unison’s down payment investment as a temporary solution or as a way to buy more home than they can afford. Rather, they are looking at it as a way to afford the home that suits their needs without taking on too much debt or higher monthly payments.
What do you think of this new program from Unison? Let me hear from you in the comments below.
If you’d like to learn more about Unison, visit www.unison.com.