Home equity agreements provide a way to leverage the equity in your home to help you meet your financial goals. Whether you’re looking to finance a remodel, consolidate debt or make a large purchase, a home equity agreement can be an attractive possibility.
But what is a home equity agreement, and what can you expect if you utilize this option? Keep reading for a look at the basics of home equity agreements, including what they are, how they work and their pros and cons.
Home equity agreements explained
A home equity agreement (HEA), sometimes called home equity sharing, home equity sharing agreement or home equity investment, is an arrangement between a homeowner and an investment company that allows the homeowner to access the some of the value of their home. They differ from home equity loans and home equity lines of credit because there is no monthly interest payment.
By granting the investment company a “lien” on your home, you can receive a lump sum of cash in exchange for a portion of the home’s appreciated value. There are no interest rates, but rather an agreement to pay back the amount provided within a specified period or upon the sale of the home. The homeowner is still responsible for property taxes and other fees associated with the home under a home equity sharing agreement, plus owners may be required to properly maintain their properties or risk facing extra fees when the agreement ends.
This type of shared equity agreement is an alternative to traditional borrowing methods, such as home equity loans or refinancing a mortgage. There are distinct benefits and drawbacks, and familiarity with home equity sharing pros and cons is essential.
How home equity agreements work
Under the terms of a typical home equity agreement, home equity investors provide a lump sum of cash to a homeowner in exchange for a percentage of the home’s appreciation, which is its equity value.
The agreement is typically structured as a lien on the home, which grants the investor the right to a portion of the proceeds from the sale of the home, should the homeowner decide to sell. The investor is paid according to the agreed-upon home appreciation percentage. If they don't sell, many home equity agreements have a timeframe of as much as 30 years, after which the principal and a percentage of the agreed-upon appreciation must be repaid.
A home equity agreement differs from home equity loans or home equity lines of credit (HELOCs). These can also allow homeowners to access their home’s equity to make major purchases or investments, but they are loans that must be paid back over a predetermined period with interest rather than an agreement toward a future payment.
Benefits of home equity agreements
Entering into a home equity agreement can provide a homeowner with several benefits, such as:
No monthly payments or interest charges
Unlike traditional methods of borrowing, such as taking out a loan or refinancing a mortgage, home equity agreements don’t require monthly payments or accrue interest charges. This can be a distinct advantage for homeowners with limited cash flow or who don’t want to be burdened with additional debt.
Lenient minimum credit score requirements
Home equity agreements often have more lenient minimum credit score requirements than traditional borrowing methods. This makes a home equity agreement an attractive choice for those who own their own home but have lower credit scores that prevent them from accessing traditional financing methods.
Flexibility in how you can use the funds
Home equity agreements offer great flexibility in how you can use the funds. The homeowner can use the funds for whatever they need, such as home improvements, debt consolidation or even a vacation.
Home equity agreement risks to consider
Despite the benefits of home equity agreements, there are also some potential risks every homeowner should consider before signing away a percentage of the equity in their home. These include:
Consequences of a lump sum payment
Home equity agreements typically provide a lump sum payment to the homeowner. Though this isn’t taxable as income, some states, counties and cities may require that you pay taxes related to the home equity agreement.
A lump sum payment also puts undisciplined homeowners at risk of making frivolous purchases or spending beyond their needs. It’s essential to consider your financial goals and how the home equity agreement will help you achieve them when spending the funds raised by this arrangement.
Perhaps most important of all, you should consider how much home equity you’re giving up and whether the appraised value is accurate. If the appraisal is low, the investment company will essentially be gaining a larger percentage of equity than it should, and the costs to the homeowner down the line could be significant. Fees can add up into the thousands too, so it’s important to read over the fine print.
It can get expensive depending on your home’s amount of appreciation
Depending on the property’s appreciation, the cost of a home equity agreement can be significant. The investing company gets a percentage of the future value of your home, meaning if your home appreciates, you will have to pay back the company’s investment in your home — the equity you received — plus its stake in the increased value.
If the home’s value remains the same, you’ll pay back the equity you drew, but you may also have to pay back any risk-adjusted discount the investor took, depending on the terms of your contract. Though you can sell your home anytime with a HEA, you’ll still owe money if your home’s value depreciates. It’s important to research and compare the cost of different home equity agreement companies, including all of their different fees and policies, before entering into an agreement.
An example of a home equity-sharing agreement
To illustrate how a home equity agreement works, here's a typical example:
Let’s say your home has an appraised value of $250,000, and you enter into a contract with one of the home equity agreement companies on the market. They agree to provide a lump sum of $25,000 in exchange for 10% of your home’s appreciation.
If you sell the house, the HEA company is entitled to $25,000. You’re free to spend the $25,000 you received as part of the agreement however you wish, though there may be penalties if you don’t pay it back when selling the house.
For instance, if the home increases in value to $300,000, in addition to the initial $25,000, the investor would be entitled to 10% of the $50,000 increase — or an extra $5,000. If, however, the equity agreement is repaid prior to any appreciation, no additional payment will typically be necessary.
A comparison of popular home equity sharing companies
Most home equity agreements are provided by companies specializing in this kind of alternative lending. Not all companies are the same, and there are some significant differences to be aware of when making your choice. Here’s a look at four of the most popular home equity-sharing companies and their differences.
Unison is a home equity agreement company that offers agreements with no interest or monthly payments to owners of single-family homes, townhouses and condominiums, provided they are owner-occupied and the primary residence of the person seeking the agreement. Unison offers flexible terms, allowing the homeowner to choose the length of the contract and the amount of their lump sum payment.
Unison evaluates homeowners’ credit, income and property before partnering with them, and applicants typically need a credit score of 620 to qualify. Unison offers a 15% investment at a minimum investment of $30,000, meaning funds are only available to people whose home is appraised at $200,000 or more. Unison also has a maximum investment of $500,000, and it should be noted that Unison home equity agreements are not available to homeowners in Alabama, Alaska, Hawaii, Montana, Oklahoma, Texas or Wyoming.
Though Unison is a legitimate company, many review sites and consumers have negative opinions about Unison due to complaints of fees, long response times and inaccurate appraisal amounts.
Hometap refers to its equity agreements as “home equity investments,” or HEIs. It offers investments in single-family homes or condos to homeowners with a minimum FICO credit score of 500, though it states that most of its customers have credit scores of 600 or above. Hometap is currently available in more than a dozen states, though its website says it's expanding into more.
To qualify for a Hometap HEI, you must also have at least 25% equity in your home, meaning you have paid down an amount equal to or greater than a quarter of your total mortgage. The company will only invest up to 25% of the total value of your home, up to a maximum of $600,000.
Under its typical terms, Hometap will receive the agreed-upon percentage of your home value when you sell, refinance or settle the agreement. You may pay Hometap off at any time during your contract term. Still, it should be noted that home appreciation will be a factor in the total amount you’re expected to repay.
Like Hometap, Point refers to its equity agreement as HEIs. Homeowners interested in tapping into their equity through Point need an appraised home value of at least $155,000, must retain at least 20% of the equity in their home after the home equity funds are disbursed and must live in the 23 states where Point is available.
Though Point says it's “much more flexible” about homeowners credit than many traditional lenders, there is still a minimum credit score requirement — though the exact credit score they demand is only disclosed during the application process.
Point has a 30-year term, which provides more time for homebuyers to repay the money. Homeowners are free to pay back the received amount before the 30-year term expires, with no pre-payment penalty.
Unlock’s HEAs are available in a handful of states to homeowners with a minimum credit score of 500 and a loan-to-value (LTV) ratio of 80%, meaning the homeowner must have paid off at least 20% of the home’s mortgage.
Unlike the other home equity agreement providers in this list, Unlock will invest in homes that are owner-occupied primary residences as well as investment properties. However, it may charge additional fees for such properties. It requires homeowners to have a debt-to-income ratio of no more than 45%, and its minimum investment amount is $30,000.
How to find the best home equity agreement companies
The best home equity agreement company depends on your specific circumstances. Before choosing one, it’s important to do your homework. Research and compare the different companies available to you to determine which one best suits your needs, being mindful of the terms offered, possible fees incurred and any penalties for early payment.
Consulting with a financial advisor can also help you understand what type of home equity sharing would be best for your situation, though this comes with additional costs.
When choosing between home equity sharing programs, choosing a reputable company with a good track record and generally positive consumer reviews is important. Lastly, be sure to read any shared equity finance agreement carefully before you sign to understand all the terms and conditions involved. If you have any questions, ask a representative of the company you’re working with for an explanation.
Alternatives to home equity agreements
Home equity agreements aren't the only option for accessing the equity in your home. They may not even be available to you, depending on which state your home is in, the amount of your mortgage you have left to pay, your credit profile and other restrictions that may vary from company to company. If no home equity-sharing programs are available, it might be best to look into other alternatives. Thankfully, the process of getting a home equity loan is not all that different from applying for a HEA with home equity share companies.
Other alternatives include taking out a traditional loan using your house as collateral or refinancing your mortgage. It’s important to research and compare all options to find the best one for your situation. Compare the best home equity loans with other available choices to have a good understanding of the comparable costs and risks.
Summary of Money’s what is a home equity agreement
A home equity agreement is a financial arrangement between a homeowner and an investment company that allows the homeowner to access some of the equity in their home. By granting the investor a lien on the home, the homeowner can receive a lump sum of cash in exchange for giving up a portion of the home’s appreciated value.
This type of agreement is an alternative to traditional methods of borrowing and features benefits such as no monthly payments or interest charges, lenient minimum credit score requirements and flexibility in how you’re allowed to use the funds.
It’s important to consider the risks associated with home equity agreements, such as the responsible management of a lump sum payment and potentially high costs caused by any future appreciation in the home.
Lastly, it’s important to compare the terms, fees and reviews of any home equity investment company you’re considering before entering into an agreement so you’re sure to understand what you’re getting and what your risks and liability may be.