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Key Takeaways
- A home equity agreement lets you access cash now in exchange for giving up a share of your home’s future value, not by taking on a traditional loan.
- You won’t make monthly payments, but you’ll owe a lump sum when you sell, refinance, or reach the end of the agreement term.
- If your home’s value rises significantly, you could end up repaying much more than you originally received.
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The equity in your home is one of your most valuable financial resources. But what if you aren’t ready to sell your home, or your credit isn’t strong enough to qualify for traditional financing? Fortunately, you may still be eligible for a home equity agreement (HEA).
Home equity agreements are a relatively new financing option that can help you access the equity in your home by borrowing against your home’s future equity. And, while similar to home equity loans, there are some key differences, such as no monthly payments.
Learn how home equity agreements work, their advantages and disadvantages, and whether one is right for you.
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What is a home equity agreement?
A home equity agreement, also referred to as a shared equity or home equity sharing agreement, is a financial arrangement that allows homeowners to access a portion of their home’s equity without incurring additional debt.
Unlike traditional home equity loans (HELs) or home equity lines of credit (HELOCs), which involve making payments and incurring interest charges, a home equity agreement provides homeowners with a one-time lump sum from a lender or investor.
How does a home equity agreement work?
Like traditional home loans, the terms of a home equity agreement are largely influenced by the home’s current value and appraisal, making it an appealing choice for those with substantial home equity.
A home equity agreement functions differently from traditional mortgage options, however. Here’s an overview of how an HEA typically works:
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- Appraisal and Agreement: The process starts with an initial appraisal to determine your home’s current market value. Using the appraised value, your lender or investor offers a lump sum in return for a portion of your home’s future appreciation. The percentage of equity exchanged depends on the lump sum amount and the specific terms of the agreement.
- Lump Sum: Once the HEA is finalized, you’ll receive a lump sum payment. These funds can be used for various purposes such as home improvements, debt consolidation, or investments. Unlike traditional loans, no monthly payments are required, providing additional cash flow flexibility.
- No Monthly Payments: A key benefit of home equity agreements is that they don’t involve monthly payments. This can be especially advantageous if you have lower credit scores and may find it difficult to meet the repayment terms of traditional loans.
- Settlement of Agreement: The agreement is usually settled when it comes time to sell the property, refinance, or after a specified period. At that point, the lender or investor receives their agreed-upon share of the home’s appreciation (or depreciation). It’s important for homeowners to be aware of any origination fees and other costs associated with settling the agreement.
Pros and cons of home equity agreements
A home equity agreement can provide short-term cash flow relief, but it comes with important long-term trade-offs. Here’s how the benefits and risks compare:
| Pros | Cons |
|---|---|
| Easier to qualify than many home equity loans, with more flexible credit and income requirements. | You give up a share of your home’s future appreciation, which could significantly reduce your profit if your home rises in value. |
| No monthly payments or interest charges, freeing up cash flow in the short term. | Large lump-sum repayment is required when you sell, refinance, or reach the end of the term. |
| Shared risk model — if your home loses value, the investor may share in the loss depending on the agreement. | Balloon-style payoff can create pressure, especially if your financial situation hasn’t improved. |
| Access cash without taking on traditional debt, which may help with debt payoff or home improvements. | Heirs must settle the agreement if you pass away, potentially forcing a sale. |
Carefully review the terms and repayment structure before signing — what feels manageable today could become costly later.
Example: How a Home Equity Agreement Can Cost You
Your home is worth $400,000, and a company gives you $50,000 today in exchange for a share of your future appreciation.
If you sell years later for $400,000, you repay the original $50,000.
But if you sell for $550,000, you could owe the $50,000 plus a sizable percentage of the $150,000 increase — meaning you might repay $90,000–$110,000 total, depending on the terms.
You get cash now with no monthly payments, but you give up part of your home’s future gains.
How to find the best home equity agreement companies
Home equity sharing companies are becoming more popular and widespread. Some of the more well-established ones include Hometap, Unison, Unlock, and Point.
Since a home equity sharing agreement could become expensive down the line, it’s vital to carefully compare the reputation, repayment terms, and the percentage of your home’s appreciation or value each company will claim.
Additionally, consider the upfront costs, as many companies charge origination and appraisal fees, which can add to the overall expense.
Another important consideration is to evaluate how lenders calculate the risk-adjusted value of your home, as this can impact the terms of the agreement. Taking the time to thoroughly assess these factors will help you choose a company that offers favorable terms and minimizes long-term costs.
Home equity agreement alternatives
Home equity agreements are just one option for gaining access to your home’s equity without having to sell your home. Be sure to compare all available options and understand the costs and risks involved. Other options include:
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Cash-out refinance
A cash-out refinance enables you to refinance your current mortgage for a higher amount, with the extra funds provided as cash. This option can be beneficial for consolidating debt or covering significant expenses. However, it typically extends your repayment term and may involve higher interest rates or origination fees. It also requires a strong credit score and sufficient equity in your home.
Home equity loans (HELs)
Traditional home equity loans offer a lump sum with fixed interest rates and consistent monthly payments, making it a viable option for homeowners who value stability in their repayment plan. However, it adds to your overall debt and requires monthly payments. A strong credit score is necessary for favorable terms.
Home equity line of credit (HELOC)
HELOCs provide a flexible revolving credit line that allows you to borrow cash as needed, often with lower interest rates compared to personal loans. Monthly payments fluctuate based on the amount borrowed. Bear in mind that your interest rate may increase, resulting in higher payments over time.
Reverse mortgage
Designed for homeowners aged 62 and older, reverse mortgages let you tap into your home’s equity without the burden of monthly payments, making it a useful way to strengthen your retirement income. However, it reduces the inheritance value of the home, as interest accumulates over time, gradually diminishing the remaining equity available to heirs.
The bottom line on home equity agreements
Whether you’re looking to finance a remodel, consolidate debt or make a large purchase, a home equity agreement could be a great way to unlock your home’s value without incurring new debt or monthly payments. It’s crucial to balance the immediate financial benefits with the potential downsides, however, such as forfeiting a portion of future appreciation and the obligation to settle the agreement.
Be sure to thoroughly evaluate your financial needs and long-term plans when considering a home equity agreement. Seek advice from a lender or financial advisor to explore alternatives like refinancing, home equity loans, or HELOCs.
By carefully weighing the pros and cons of each option, you can make informed decisions that best support your financial goals.
FAQ
A home equity agreement (HEA) is a contract where you receive a lump sum of cash in exchange for giving an investor a share of your home’s future appreciation, instead of taking out a traditional loan.
No. Home equity agreements typically do not require monthly payments. Instead, you repay the investment — plus the agreed-upon share of appreciation — when you sell, refinance, or reach the end of the term.
Repayment usually happens when you sell your home, refinance your mortgage, or when the agreement term ends (often 10–30 years). You’ll owe the original amount you received plus a percentage of your home’s change in value.
In many agreements, the investor shares in the loss if your home depreciates, meaning you may owe less than expected. However, terms vary by company, so it’s important to review the contract carefully.
No. A HELOC is a loan with interest and monthly payments. A home equity agreement is not a loan — it’s a shared investment in your home’s future value.
Qualification requirements vary, but many HEA providers have lower credit score and income requirements than traditional home equity loan lenders. You’ll typically need sufficient home equity to qualify.
They can make sense for homeowners who need cash but want to avoid monthly payments. However, they can become expensive if your home appreciates significantly, so it’s important to compare alternatives before deciding.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
By refinancing an existing loan, the total finance charges incurred may be higher over the life of the loan.
