What Is a Home Equity Agreement?
Home equity agreements let you leverage the increase in your home's value 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 is an option worth considering.
But what is a home equity agreement, and what can you expect if you decide to enter into one? Keep reading for information on the basics of home equity agreements — including what they are, how they work and their pros and cons — and information about the best home equity sharing companies.
Table of Contents
- What is a home equity agreement?
- A comparison of popular home equity sharing companies
- How to find the best home equity agreement companies
- Alternatives to home equity agreements
- Summary of Money’s What is a home equity agreement
What is a home equity agreement?
A home equity agreement (HEA), sometimes called home equity sharing, home equity sharing agreement or home equity investment, is an arrangement between a property owner and an individual investor or investment company that allows the homeowner to access some of their home's value. Unlike traditional home equity loans and home equity lines of credit (HELOCs), there's no monthly interest payment.
By granting the investment company a “lien” on your home, you receive a lump sum of cash in exchange for a portion of the appreciated property value. You must repay the amount owed within a specified period or upon the home's sale, and you'd be responsible for property taxes, homeowners insurance and other fees associated with the house. You may also be required to properly maintain the property or risk facing extra costs at the end of the agreement.
A shared equity agreement is an alternative to traditional borrowing methods, with distinct benefits and downsides, so familiarity with home equity sharing pros and cons is essential.
How does a home equity agreement work?
Under the terms of a typical home equity agreement, home equity investors provide a homeowner with a lump sum of cash in exchange for a percentage of their future equity.
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 home sale, should the homeowner decide to sell. The investor is paid according to an agreed-upon home appreciation percentage. If the home's value decreases, the repayment amount should also decrease.
If the home isn't sold, many home equity agreements have a timeframe between 10 and 30 years, after which the property owner must repay the principal plus the agreed-upon percentage of the home's appreciation.
A home equity agreement differs from home equity products like equity loans or HELOCs, which also provide access to home equity but 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
While these agreements may not be for everyone, entering a home equity agreement can offer several benefits to property owners. Mark Charnet, founder & CEO of American Prosperity Group in Sparta, NJ, says, “If this will benefit the homeowner in any way, there should be a consideration for this type of leverage.”
Some of those benefits include:
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 those 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 flexible minimum credit score eligibility requirements than traditional borrowing methods. This leniency makes them an attractive choice for those who own their own real estate but have lower credit scores that prevent them from accessing conventional financing methods or qualifying for a low interest rate.
Flexibility in how you can use the funds
Home equity agreements have no restrictions on how the funds are used. Homeowners can use them for whatever they need, such as home improvements or debt repayment.
Home equity agreement risks to consider
Every homeowner should consider the cons of home equity agreements every 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 large, one-time 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 using 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 home 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. Closing costs, including the transaction or origination fee, can add up to thousands of dollars, so reading the fine print is essential.
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 investor or company gets a portion of your home’s future value. If it appreciates, you will have to repay the company’s investment in your home — the amount of money you received — plus its stake in the increased value.
“Homeowners might find themselves parting with a considerable portion of their equity, exceeding what they might have repaid with interest on a traditional loan,” says Dennis Shirshikov, head of growth at Awning.com, a real estate investment company.
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. Before agreeing to this type of arrangement, it's essential to research and compare the policies of different home equity agreement companies.
You'll need to make a balloon payment
Whether you sell your house or reach the end of the sharing agreement term, you must repay the investor or company with a single balloon payment. This may not be an issue if you can use the home sale proceeds to repay, but if you reach the end of the agreement term without selling the property, you’ll need a large amount of readily available cash.
And, if you decide to end the agreement before the end of the term without selling the home, you’ll also have to make a single, large payment. This is known as a buyout because you're “buying” the investor out of the agreement.
Take these scenarios into account when considering an equity-sharing agreement. Review your personal finances and identify how you’ll repay the investment if you stay in the home. You should also ask the equity sharing company if they charge a prepayment penalty, should you end the agreement early, and how much that penalty would be.
An example of a home equity-sharing agreement
To illustrate how a home equity agreement works, here's a simple 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 for $250,000, 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.
Now, 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.
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 best home equity-sharing companies and their differences, listed alphabetically.
Hometap
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 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 agreement’s 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 repayment amount.
Point
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.
Qualification requirements are much more lenient than with a traditional loan. Although your credit score will still be considered, Point will accept scores as low as 500.
Point has a 30-year term, which provides more time for homebuyers to repay the money. Homeowners can repay the received amount before the 30-year term expires, with no prepayment penalty.
Unison
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 and property before partnering with them, and applicants typically need a credit score of 620 to qualify. There are also income requirements. 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 its 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 it due to complaints of fees, long response times and inaccurate appraisal amounts.
Unlock
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 they 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 and investment properties. However, it may charge additional fees for such properties. It also 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 available companies in your area to determine which one best suits your needs. Be mindful of the terms offered, possible upfront 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.
Choosing a reputable company with a good track record and generally positive consumer reviews is important when deciding between home equity sharing programs. Also, 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.
“Look for companies with transparent terms, a track record of fair dealings, and robust customer support. It's also essential to compare the cost implications of different agreements. For instance, some companies might offer more favorable terms for the percentage of equity shared versus the cash received,” says Shirshikov.
Alternatives to home equity agreements
Home equity agreements are one of many options 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 you owe your current mortgage lender, 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.
You can look into a home equity loan, which is a second mortgage with separate monthly payments and payoff dates, or a home equity line of credit (HELOC) that works much like a credit card with a maximum credit limit that can be used, repaid and replenished during a predetermined period of time. Thankfully, the process of getting a home equity loan or line of credit 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. You could also get a cash-out refinance, an unsecured personal loan, or even a reverse mortgage if you meet the age requirements.
It’s important to research and compare all financing options to find the best one for your financial situation. Compare the best home equity loans, and best no appraisal 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, you receive a lump sum of cash in exchange for giving up a share of your 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 can 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.