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Fraction rating | “Fair” Shareholders’ Equity

For more than a decade, mortgage interest rates have mainly been on a downward trend, with ‘historically low’ rates falling year on year. But even with low rates, tapping into equity typically means more debt and higher monthly payments.

But many homeowners (particularly those living in urban areas with housing shortages) are seeing their net worth growing. By taking advantage of the home’s equity, they can invest outside their home or enjoy high dollars (such as a home remodel). But entering into new financial obligations does not always make sense, even if your house is a valuable asset.

Fraction is an innovative company that reinvents the HELOC. It operates in British Columbia and Ontario, as well as Washington State. It allows borrowers to take out a loan without payment with part of their home as collateral. Repayment starts after ten years or when a borrower sells their home.

Borrowers pay a minimum interest rate of 5.83-7.08% APR when the loan is repaid, but the “effective” interest rate can increase because Fraction buys an equity stake in your home. The maximum interest rate of the fraction is 11.85-15% APR. The minimum and maximum APR depend on the term of the loan (longer loans have higher rates).

Fraction LogoHELOCs with no monthly payments for five or ten years (or pay when you sell). Option to renew the loan after five years. Interest based on house price growth.
Fraction caps interest rates so homeowners in high-growth areas can absorb their upward growth. Loans up to 45% of your home value (35% for 10-year loans) or $1.5 million.

What is fracture?

Fraction is a HELOC company reinventing the HELOC loan space. The lender, which operates in British Columbia, Ontario and Washington State, operates more like an equity “investor.” The loans it issues have interest rates tied to the value of your home rather than certain outside interest rates.

As a borrower, you pay interest rates between 5.85% and 11.85%, but the exact amount you pay will depend on the value of your home when you sell it. The faster your house price rose during the loan period, the higher the interest you pay. But Fraction caps the maximum interest rate, so you can make extra profit if your home grows astronomically.

What does it offer?

Fraction offers HELOCs for paid off homes in British Columbia, Ontario, and Washington, but these are not traditional HELOCs. The HELOC Group has a unique set of functions.

Must have a paid off house

A fraction must have an initial lien on your home. That means you have to own your home freely and clearly in order to take out a loan with Fraction.

Can be used to buy a house

The only “exception” to the paid-off house rule is for homebuyers who want to use Fraction to buy a home. Fraction has a maximum LTV of 35% for 10-year loans, so borrowers must put down a minimum of 65% to get a 10-year loan.

Fraction Screenshot

Get instant access to $1.5 million

Fraction offers HELOCs up to $1.5 million or 45% (35% for 10-year loans) of your home equity position. Once approved, borrowers can get instant cash.

No monthly payments for the loan term

Fraction offers HELOC terms of five and ten years. During the loan period, borrowers do not pay monthly payments.

Variable interest rate based on the value of your home

The fractional interest always falls in a range between 5.83%-11.85% APR for five-year loans. Ten-year loans have interest rates ranging from 7.08%-15%. However, the interest is not dependent on an external interest. Instead, the rate depends on the value of your home when you pay off the loan.

Full refund required

When a borrower sells their house, their loan is due in full. The loan is also payable in full when the loan term ends. Borrowers who cannot repay their loan may have the option to extend their loan for another five years.

Option for a 5 year extension

Fraction offers a five- and ten-year loan product, but borrowers can request a five-year loan extension when their term has expired. The renewal is subject to a credit check and appraisal. If approved, borrowers must pay a 1% renewal fee.

No cash costs

Borrowers pay a variety of fees, including a 2.5% loan origination fee. However, this fee can be deducted from the HELOC proceeds, so your own borrowing costs are limited or even $0.

Very limited availability

Fraction only provides loans in British Columbia, Ontario and Washington State.

Are there any costs?

When you take out a HELOC through Fraction, you pay a variety of fees, including inspection and appraisal fees, title insurance fees, and a 2.5% loan origination fee.

These costs can be deducted from the proceeds of the loan, so that you have no cash costs at the time of borrowing.

Borrowers who choose to renew their loan beyond the initial five-year term pay a 1% loan renewal fee.

How does fraction compare?

Fraction is a loan designed to help homeowners access their equity. The tool it offers is either the “best of both worlds” or the worst, depending on how you look at it.

As a loan, Fraction has modest fees (especially compared to reverse mortgages) and requires no monthly payments over ten years. However, the “interest” on the loan is linked to your home value. And many Fractional borrowers will see effective lending rates in double digits. Borrowers pursuing traditional HELOCs will typically have to make payments, but their interest rate is more stable than Fractions. To compare HELOC and Reverse Mortgage rates, you can use a site like LendingTree that allows users to get real quotes from multiple competitors.

Unlike a typical equity sharing arrangement, Fraction puts a little more risk on homeowners. If a home’s value falls, the borrower still has to pay principal and a minimum interest. However, the maximum interest rate is capped. If your home value explodes, you collect the advantage. People who participate in equity-sharing schemes generally have no ‘downside’ risks, but they also cannot take advantage of the upside gains. People who want downside protection may want to consider HomePace for a stock-sharing scheme.

However you slice it, Fraction offers a unique product. It’s important to compare Fraction with HELOCs, reverse mortgages (if you reach retirement age), and equity-sharing plans, to see if it makes sense for you.

Here’s a quick comparison of some of the more popular equity sharing products:

How do I open an account?

Fraction’s online application is simple and secure. Applicants begin by providing their property address so that Fraction can ensure the home is in the correct lending area. Assuming the property is eligible, users provide personal and financial information before submitting their simple online application.

To be approved, borrowers undergo a credit check and appraisal of the home to ensure the asset can support the loan.

Is it safe and secure?

Fraction is a technology company that is used to doing business online. The website is secured and encrypted to keep user information safe. It is also a BC licensed mortgage broker in Canada and a member of the National Mortgage Lending Services in the US. These accreditations demonstrate that Fraction must adhere to a certain set of standards to protect borrowers. In the US, this includes showing borrowers loan and fee documents.

How do I contact a breakup?

The United States headquarters for Fraction is 2120 University Ave, Unit 407, Berkeley, 94704. In the United States, you can call Fraction at 1-844-562-5546. People with questions can also use the contact button in the lower right corner of the Fraction website.

Is it worth it?

Fraction has an interesting value proposition, but effective interest rates on the loans seem high, even given the rising interest rate environment we are in right now. That said, no payment loan is unique and they offer value to people who want to access their equity without increasing their monthly outflow.

In general, it is not a good idea to use equity for luxury spending. But using the equity to invest elsewhere or to pay for really important expenses (e.g. school for children) can be a good option. Before using Fraction, compare it with other loan options to make sure you get the best deal.

Fracture Characteristics

Up to 45% of your home’s total valueMaximum investment of $1,500,000

10 years + 5 years extension

Maximum Loan-to-Value Ratio (LTV)

Maximum Debt Income Ratio (DTI)

Mon-Fri, 8am-5pm (EST)

This post Fraction rating | “Fair” Shareholders’ Equity was original published at “https://thecollegeinvestor.com/39756/fraction-review/”

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