Home equity agreements are just one of many ways you can turn your home equity into cash. Unlike a HELOC or home equity loan, these don’t come with interest or monthly payments, and they’re not a debt or loan.
Instead, they’re an investment. Instead of borrowing money, you sell a share of your home’s future value to an investor in exchange for cash upfront. You then repay the investor after a certain period of time has passed, or when you sell the house or refinance.
Are you considering a home equity agreement for your home? Here’s what you need to know.
How Home Equity Agreements Work
Home equity agreements allow an investor or investment company to buy a percentage of your home’s future value. That means if your home appreciates by the time the repayment comes due, the investor gets more money back than they initially paid you. If your home loses value, they share that loss, too.
Here’s how the exact process works:
- Your home is appraised. You order an independent appraisal to determine your home’s current market value, which is the basis of the initial investment.
- You receive cash. The investor gives you a percentage of your home’s appraised value in cash. For example, if the investor offers an 8% investment and your home is valued at $400,000, you’d receive $32,000.
- The investor puts a lien on your home. Unlike a mortgage, your home isn’t used as collateral in a home equity agreement. Instead, the investor puts a lien on your home — a legal claim to the property if you fail to repay the agreed-upon amount.
- You repay the investment. Home equity agreement terms vary, but you usually need to repay the investment within 10 to 30 years. If you sell or refinance the home before then, you must repay it sooner.
The exact amount you owe at the end of the agreement depends on your home’s value at that time. For example, if the home mentioned above rises to $500,000 in value by the time the agreement ends, the investor would get $40,000 back, rather than just the $32,000 they paid initially (0.08 x 500,000). If the home fell to $350,000, the investor would get back only $28,000.
Keep in mind that the above example doesn’t take into account any fees that may be charged upfront and taken from your initial payment.
Get started here to check your eligibility for a home equity loan or HELOC.
Is a Home Equity Agreement the Same as a Home Equity Investment?
You may also see home equity agreements referred to as home equity investments (HEIs), the two terms describe the same product. Both involve selling a share of your home’s future value to an investor in exchange for a lump sum of cash, with no monthly payments or interest. The terminology just varies by provider and context, so if you’ve encountered either term in your research, know that they’re interchangeable.
Pros and Cons of Home Equity Agreements
Home equity agreements can be a good strategy for some homeowners, but they’re not right for everyone. Make sure you consider the pros and cons below before entering into one of these contracts.
Benefits
- No monthly payments or interest: Home equity agreements aren’t loans, and they won’t add a monthly payment to your household. There’s also no interest on the money you borrow.
- Easier qualifications: A home equity agreement is often easier to qualify for than a home equity loan, HELOC, or other mortgage product. They have more flexible income requirements and allow for lower credit scores (Point, for example, allows scores down to 500).
- Flexible funds use: There are no restrictions on how you can spend the money from a home equity agreement. Use the funds however you wish.
- Reduced foreclosure risk: Since home equity agreements have no monthly payments, there’s no chance of foreclosure due to non-payment during your contract period, which differs from mortgage products like home equity loans and HELOCs.
Drawbacks
- High potential cost: If your home appreciates significantly, you could pay the investor much more than they initially gave you.
- Upfront fees: Home equity agreements tend to come with a number of upfront costs, including origination fees, appraisal fees, and other closing costs. You usually pay between 3% and 5% of the initial payout.
- Lump sum repayment: You must repay the investor as a lump sum all at once. This requires either having the funds on hand or selling your home and using the proceeds.
- Complex terms: The terms of home equity agreements can be complicated. It’s important to read the fine print and understand all conditions and costs before moving forward.
- Only available in certain markets: Home equity investors are only present in certain markets, so these agreements are not an option for every homeowner.
HEAs vs. Other Home Equity Options
Home equity agreements are just one of many ways to tap your home equity. Here’s how they compare to some other options.
| Home Equity Agreement | Home Equity Loan | HELOC | Cash-Out Refinance | Reverse Mortgage | |
| Payout | Lump sum | Lump sum | Line of credit | Lump sum | Lump sum, monthly payments, or line of credit |
| Monthly Payments | No, repaid as a lump sum at the end of the contract or when you sell the house | Yes, principal and interest payments start right away | Usually interest-only for the draw period, then full principal and interest payments after that | Yes, principal and interest payments start right away | No, repayment doesn’t happen until you pass away, sell the home, or permanently move out |
| Interest | No | Yes | Yes | Yes | Yes |
| Tax Deductible Interest | No | Yes, as long as the money is used to buy, build, or improve your home | Yes, as long as the money is used to buy, build, or improve your home | Yes | No |
| Limitations | Only in certain geographic markets | Must be 62 or older (sometimes 55, depending on the lender) |
Get started here to compare ways you can tap into your home’s equity.
Who is an HEA Good For?
Home equity agreements are a good option if you need cash but cannot take on another monthly payment right now.
They can also be good options for homeowners with credit or income issues, as they’re easier to qualify for than other equity products, and they might be smart if you plan to sell or refinance within the agreement’s contract period.
They’re not a great option if you expect your home value to skyrocket by the time your agreement comes due, since this would mean repaying the investor much more than they initially paid you.
How to Get a Home Equity Agreement
Getting a home equity agreement is a simple process. To start, you check that you’re eligible. Eligibility requirements — including credit score minimums and equity levels — vary depending on the investment company, so be sure to check at least a few.
Popular options include Point, Unison, Hometap, and Unlock.
You should also compare each option’s terms, fees, and the amount of your home’s appreciation that the investor shares in if it gains value.
Once you’ve chosen an investor, you need to:
- Get an appraisal: This determines your home’s value — as well as your equity stake — and helps the investor calculate your payout.
- Review the contract: Read the fine print and make sure you understand your obligations under the agreement. Check for any early termination fees, buy-out options, and other financial details.
- Talk to a professional: If you’re not sure a home equity agreement is right, consider talking to a legal professional or financial advisor. They can help you evaluate the agreement in light of your current needs and budget.
Once you sign the agreement, you receive your funds and do with them as you wish. Many people use home equity agreements to pay for home improvements or to pay off debts.
FAQs about Home Equity Agreements
What Exactly Is a HEA?
A home equity agreement is an arrangement in which an investor gives you a lump sum of money in exchange for a portion of your home’s future value. They’re only available in certain geographic markets.
How Does a HEA Differ From a HELOC or Refinance?
A home equity agreement differs from a HELOC, home equity loan, and refinance in that it is not a type of loan. No interest is charged, and you won’t make monthly payments. Instead, you repay the investor a portion of your home’s value when you sell the home or your contract period is up.
Who Qualifies for a HEA?
Home equity agreements tend to be easier to qualify for than home equity loans, HELOCs, and other mortgage options. You typically need at least a 500 credit score to be eligible and must live within the specific geographic markets the investor operates in.
What Are the Costs for a HEA?
The costs of a home equity agreement vary by investor, but you’ll usually pay between 3% and 5% of the total investment amount in upfront fees. You will also owe the investor a share of your home’s future value once the contract expires or you sell the house. If your home appreciates a lot by the time your payment comes due, you may owe the investor much more than their initial investment.
Can You Pay off the Investor Early?
With most home equity agreements, you can pay off an investor early or buy out the investment, though there may be a fee for doing so. Make sure you understand the full scope of long-term costs you could owe before signing a home equity agreement.
Get Guidance Now
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