Photo: Doug Letterman/Flickr
The ideas of “refinancing” and “home equity loans” are no doubt the source of much headache for homebuyers. Traditionally, these tools were among the only options for homeowners looking to access the money locked up in their home — by borrowing against their home.
The founders of a new financial startup were so frustrated with traditional methods that created more debt, that they developed an entirely new asset class through a new financing product called Point. But, unlike other financing options where homeowners retain 100 percent ownership of their homes, Point buys into a homeowner’s accumulated equity for an upfront payment to the homeowner.
By using Point, homeowners could lower their monthly mortgage payments without creating more debt or adding additional monthly payments.
BuzzBuzzNews had the opportunity to speak with Eddie Lim, one of Point’s co-founders, about how the concept originated, receiving backing from a major venture capital firm and the future of homeownership in the US.
BuzzBuzzHome: How did the idea for Point come about?
Eddie Lim: Point was founded in January 2015. The three members of the founding team – myself, Eoin Matthews and Alex Rampell — had all experienced the challenges and frustrations of home refinancing and home equity loans.
My experience is representative of what many of Point’s customers experience today. I had some business success and ultimately an acquisition of my previous company, TrialPay, I was ready to jump back into the entrepreneurial world. To support the venture, I wanted to take some cash out of my home. It had appreciated in value and it seemed like a smart move to build up some cash reserves for the business and lower my monthly mortgage payment.
Despite a strong personal balance sheet, low loan to value ratio and a strong track record as a businessperson, several major banks rejected my application. Inadequate income, they said! That got me wondering why home wealth was so illiquid, and why can you only borrow against your home? Even then, is a one-size fits all approach to underwriting as defined by Fannie Mae and Freddie Mac really suitable?
BBH: What were the most challenging obstacles in bringing the concept to fruition?
EL: This is a new asset-class so there’s no playbook with homeowners or investors. There is no legal template, no customer acquisition template, no underwriting template, no investor template. It’s no understatement to say that we have had to figure out everything and create everything from scratch. That has its rewards but it’s also been a challenge.
BBH: On the surface, POINT initially sounds a bit like a reverse mortgage. How is Point financing different?
EL: At a high level, Point’s product is not a loan or mortgage product and that has all sorts of implications for our homeowners. The product is structured as an investment opposed to a mortgage or loan. Point is HPA-indexed while reverse mortgages are interest-rate indexed.
A reverse mortgage requires that a homeowner be 62 or older but Point’s customer is typically active in the workforce. While reverse mortgages typically endure till the death of the homeowner, Point offers homeowners a 10-year term – homeowners can sell or buy Point out at any time during that 10-year term.
Point’s homeowners are typically selling or buying back the position early in the 10-year term. We expect return of capital by year 4. The capital is mostly being used today as an alternative to secured debt option, like home equity loans.
There’s no current pay to the investor or homeowner, so in that respect, it shares a similarly with a lump-sum reverse mortgage.
BBH: How does Point financing benefit the homeowner in the long and short-term?
EL: Point is most effective for homeowners who are optimizing for cash-flow, optimizing for lower monthly payments today or who are simply trying to avoid debt. This could be a homeowner thats want to retire expensive debt now — especially when they are trying to improve their credit situation.
Or a homeowner that has a lot of home equity wealth, and a need for a significant cash sum — but is not qualifying with traditional lenders. Also, a homeowner that wants to set aside some cash now for investment, but they don’t want a monthly debt payment.
Ultimately, we all understand the idea behind wealth diversification but few of us get to put that theory into practice when it comes to the largest single asset we will probably own in our lifetimes, our home.
The home over your head is highly concentrated wealth risk. It’s the equivalent to betting your retirement on one stock. Point makes it possible to diversify that risk by taking some of the wealth from your property without borrowing. In the future, we hope to make it easy for homeowners to diversify their home exposure by literally spreading their home equity wealth across many properties.
BBH: What is the make-up of the average Point homeowner? Who’s using Point?
EL: Our customers are varied. We have small business owners and entrepreneurs who want a cash-flow friendly alternative to borrowing against their home equity. We also have homeowners using Point as a bridge to selling their home.
There are homeowners using Point to pay off large debt obligations and improve their finances. And, we see homeowners using Point to finance upgrades and home renovations.
The product’s inherent flexibility means that the use-cases and customer profiles vary widely. What defines many of the homeowners we work with is that they are in a period of their lives when they are optimizing for cash-flow whether that is because of investment opportunity or financial constraints.
BBH: What kind of homeowner would you recommend take a closer look at Point as a financing option?
EL: Someone who is asset rich but cash constrained and who needs to optimize for cash flow.
BBH: What are the risks for the homeowner of entering into a Point financing agreement?
EL: There are two important risks.
First, if your home appreciates a lot, Point will be more expensive. That is a feature of the product – if your home is appreciating a lot, you can afford to give up more of its appreciation.
Conversely, if your home is depreciating a lot, Point is cheaper and that’s ideal because you need your capital to be cheaper when your wealth has diminished.
However, we went a step further with Point and we actually cap the cost to the homeowner so that, in the event that the home experiences runaway appreciation, Point’s cost is still capped at a reasonable annual interest rate. This cap clearly defines a “most-expensive” threshold for the cost of Point to the homeowner.
The second risk is something that Point shares in common with mortgages and HELOCs. It is a secured product meaning Point places a lien on your property. So, if 10 years pass and you won’t sell the home and you won’t repurchase Point’s position, then we have the right to foreclose on the homeowner. That’s highly unlikely, but that’s a risk.
BBH: How does Point make money?
EL: There are no fees for applying for Point, but If the homeowner chooses to accept funding from us, we deduct a 3% processing fee from the funds wired to them.
Additionally, homeowners cover third party costs including appraisals and escrow. When you sell your home, refinance, or when the term limit is reached — whichever is first — Point is repaid its original investment amount and its share of your home’s appreciation.
BBH: Are there any scenarios where Point would lose money on a contract?
EL: Yes. There’s alignment between the investor and the homeowner. If a property depreciates then Point stands to lose money. In fact, we share in depreciation below a threshold value at the same rate at which we share in the appreciation above that threshold value.
This is transformative: the investor’s actual return is contingent on the property appreciating. That’s different from almost every financial product out there because it creates alignment between the homeowner and the investor. If the property does well, we do well.
BBH: When did you begin speaking with Andreessen Horowitz about funding potential? Why do you believe it will be beneficial working with this firm on further building Point?
EL: Point is creating a new asset class. This is a long-term effort that requires the best partners in the world. The company needed capital to bring this idea to market but, just as importantly, we needed visionaries backing the company. A16z [Andreessen Horowitz] are best-in-class visionaries. They are looking to change the world for the better, and we’re fortunate to join their family.
BBH: Where would you like to see Point 5 years from now?
EL: In 5 years, Point should be something that every homeowner considers as essential as diversification when investing in the stock market. Getting Point on your home should be like buying an ETF for your primary residence – a cost effective, easy way to diversify your home equity wealth that pretty much everybody does.
We’re not just trying to create an alternative source of funds for people who need money, but trying to create a wealth protection and wealth generation platform.
BBH: The Homeownership rate is at its lowest level since it first began being tracked by the Census Bureau in 1965. Do you think it’s bottomed out? Can we expect to see levels begin to rise again?
EL: We believe that we’ll see the number of homes purchased increase over the next few years. We are finding that millennials have the appetite to own homes and it helps that many are paying down or off their student loans. The job market has improved and more Millennials are saving for a down payment. But in coastal cities, the down payment remains high. One of our future product offerings will help with down payments.