While you pay back a home equity loan with fixed monthly installments, home equity agreements do not have payments at all. Instead, you agree to pay the HEA company a certain percentage of your home’s future value when you sell it.
The HEA company is betting that the home will appreciate in value, earning it more money. That’s why home equity agreements are also commonly called home equity sharing or home equity investments.
This article by the MarketWatch Guides team will review HEAs, how they work, the pros and cons of HEAs, alternatives and other considerations for homeowners seeking to unlock access to their home equity.
- Home equity agreements allow homeowners to borrow against their equity without monthly payments.
- You may qualify based on your equity, regardless of creditworthiness.
- HEAs require repayment of the borrowed amount and part of the future appreciation at the home’s sale or end of the loan term.
- You should carefully consider HEA terms and alternatives for accessing home equity.
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Learn more about how to qualify for home equity loans here.
What Is a Home Equity Agreement?
Home equity is the portion of the homeowner’s property they own outright, calculated as the property’s current market value minus any outstanding mortgage balances.
The structure of a HEA is a little complicated, but basically it works like this: A HEA company agrees to give you a lump sum of cash based on the value of your home and the equity you have in it right now. Then, when you go to sell the home, you agree to pay back a fixed percentage of the home’s appreciation between now and then – often as high as 40%.
>> Related: Learn more about the best ways to tap into your home equity.
How Do Home Equity Agreements Work?
The application process for an HEA is similar to that of a traditional home equity loan, but qualification requirements tend to be much less stringent. HEA providers often require proof of home ownership and a certain percentage of home equity — typically 30% or higher.
During the approval process, the financial institution or private investor will appraise your property to determine the value of your home. Because HEA providers are financially rewarded if your home increases in value, some may apply a reduction to your home’s appraised value, which ensures they start the agreement already making a profit.
After approval, you receive a lump-sum payment upfront – minus an origination fee. You will have to repay the funds along with a fixed percentage of your home’s appreciation at the home’s sale or at the end of the agreement, which typically ranges from 10 to 30 years.
How HEAs Work
- The provider ensures you meet its eligibility requirements
- The provider requires an appraisal to assess your home’s value
- If approved, you’ll typically need to sign the paperwork, pay the closing costs and then receive a lump-sum payment upfront
- Upon sale of the home or at the end of the agreement term, the HEA provider or investor gets a fixed percentage of your home’s appreciation
Who Are Home Equity Agreements Best For?
When compared to traditional types of loans — such as personal loans, mortgages or home equity loans — HEAs may be beneficial for some homeowners.
As HEAs do not require monthly payments, lenders may be more lenient regarding your income and credit history. This improves your chances of approval if you have less-than-ideal creditworthiness and/or a high debt-to-income (DTI) ratio, which may prevent you from qualifying for traditional loans. DTI measures your monthly income against your monthly debt obligations.
If a homeowner has limited or irregular income, HEAs may also be a helpful option to consider. Inconsistency in income not only reduces your eligibility for traditional loans, but can make it difficult to manage recurring payments. If you have a variable or limited cash flow, HEAs can help you access equity you may not be immediately able to otherwise.
>> Related: Learn how to calculate home equity.
Pros and Cons of Home Equity Agreements
As with any financial agreement, HEAs have various advantages and disadvantages you should consider before signing.
No monthly payments: HEA providers give you the funds upfront without requiring monthly payments. Instead of receiving payment upfront, providers gain financial rewards through owning a percentage of the appreciation on your home. You need to pay this when you sell the home or at the end of the agreement timeline.
Retain home ownership: Unlike traditional home equity loans, you retain ownership of your home. You must repay a percentage of the appreciation of your home (plus the original loan amount) when you sell your home or at the end of the loan term.
Lower qualification criteria: If you have significant equity in your home but a lower credit score, it may be easier to qualify for a home equity agreement than a home equity loan.
Can cost much more than home equity loans: You may pay significantly more than you would through interest on equity loans, particularly if your home’s value considerably increases over time.
May be limited in options when selling a home: HEAs may have specific limitations that you must consider before selling the property.
Limits on property repairs or modification: The HEA provider might prevent you from making specific home repairs, home improvements or other modifications to your house
How Much Does a Home Equity Agreement Cost?
The costs associated with HEAs vary according to how much equity you have in your home in addition to the costs and fees applied by different providers.
HEA companies may charge an origination fee of between 3% and 5%. Along with the origination fee, you may have to pay a few thousand dollars to cover the administrative costs in addition to the home appraisal and other legal fees.
If you have $200,000 in equity on a $300,000 property, you qualify for $50,000 in funding. With 4% required for just origination, your upfront costs would start at around $2,000, not including the appraisal and legal costs.
At the end of the term or during the sale, it is very likely you would pay a percentage of the appreciation. For example, a promise to pay 40% of the appreciation on a home that increases $300,000 in value would mean owing $120,000 to the private investor.
However, the interest rates and fees when using revolving credit, such as a 30-year home equity line of credit (HELOC) with a 10-year draw period, a 20-year repayment period and a 10% annual percentage rate (APR), could cost less than $5,000, provided that you spend a small amount and repay it quickly. APR represents the true cost of a loan, both interest rates and fees.
On the other hand, a traditional loan, such as a home equity loan with a 7% APR on a $50,000 loan with a 30-year term, could cost an additional $70,000 in interest and fees.
>> Related: Learn more about how much equity you can borrow from your home.
HEA Terms and Conditions
When reviewing HEAs, it’s important to understand the typical terms and conditions.
A good place to start is with the appreciation value, which is how HEA providers and investors primarily profit from your agreement.
Say that you’re a homeowner who signed an HEA to pay 15% of the appreciated value of your home. The home was initially valued at $200,000, and the home has increased to $350,000 — a $150,000 appreciation. You could owe $22,500 at the time of sale or the end of the agreement timeline along with the original borrowed amount, under standard terms.
In addition to origination fees and other upfront costs, HEAs may limit what a homeowner can do with the property. An HEA may require you to continue living at the property and/or to request approval for home improvements or modifications to the property.
How To Get a Home Equity Agreement
While there are similarities between applying for an HEA and a traditional loan, there are a few key differences. For one, HEAs are usually not available from traditional home equity loan lenders but instead from private providers or investors.
The following steps can help you obtain an HEA:
- Check eligibility requirements: Be sure to review the eligibility criteria as these may vary by lender.
- Request quotes from multiple providers: Shop around when considering HEAs to ensure you get the best offer for what you need.
- Compare all offers and terms: Review the terms and details of all offers, including the percentage of funds that will be provided, any limits that apply to renovating or repairing the home, the length of the agreement, when repayment is required and the percentage of appreciated value required at repayment.
- Consult professionals: To avoid any end-of-term surprises and to ensure you know what you’re getting into, consider consulting with a credible lawyer, accountant or financial advisor about your HEA before agreeing to the terms.
- Negotiate terms if possible: Just as you can negotiate on home equity and HELOC loans, lenders may allow you to negotiate the fees for your home equity agreement. Consider doing so before signing an agreement.
- Review the agreement thoroughly before signing: Be sure you understand all the requirements and limitations as well as what to expect throughout the agreement.
HEAs vs Home Equity Loans
The table below details some key distinctions that you should keep in mind when evaluating HEAs as compared to home equity loans.
| Home Equity Agreement | Home Equity Loan |
|---|---|
| No monthly payments on principal or interest required | Money borrowed has to be repaid with interest over time |
| The lender is owed a percentage of the home’s appreciation | Your home has to be used as collateral |
| You retain ownership of the property and occupancy rights, although the investor owns a percentage of future appreciation (Some violations of terms may result in loss of ownership) | Directly carries the risk of foreclosure if you default on the loan |
| Does not directly affect credit or debt-to-income ratio | Debt incurred with a traditional loan |
>> Related: Learn more about the best home equity loans.
Home Equity Agreement Alternatives
In addition to home equity loans, other alternatives to HEAs include a home equity line of credit, reverse mortgages, personal loans and cash-out refinancing.
If you take out a HELOC, you gain access to a revolving line of credit against the equity in your home that you can continue drawing from as long as there is an available balance. You can increase that available balance by repaying previously borrowed amounts. A reverse mortgage allows borrowers to access the equity in the home as long as you continue to live there.
You could also consider taking out a personal secured or unsecured loan, which comes with monthly repayment schedules and potentially a lower risk to home equity (specifically for unsecured loans). Cash-out refinance is another alternative, which involves replacing your existing mortgage with a higher mortgage loan and cashing out the difference between the two.
| Loan | How it works | Repayment model | Impact on equity |
|---|---|---|---|
| HEAs | Borrow loan amount and promise future appreciation | Repay loan and percentage of appreciation at the sale of the home or end of the loan | Decreases equity now, and may also decrease at the sale of the home or end of the loan term |
| Home equity loans | Borrow lump sum against equity | Monthly payments with interest | Decreases equity until repaid |
| HELOCs | Revolving line of credit against equity | Can use balance as needed during the draw period and pay back borrowed money during the repayment period | Varies depending on how much you have borrowed |
| Reverse mortgages | Monthly payments to you that decrease home equity | Need to repay the loan only if you move out of the home | Decreases equity over time, unless repaid |
| Personal loans | Borrow a lump sum of money based on your creditworthiness and/or collateral | Monthly payments with interest | Does not directly affect equity |
| Cash-out refinancing | Replace the mortgage with a higher loan amount, repay the initial loan and cash out the difference | Monthly payments with interest | Decreases equity until repaid |
The Bottom Line for HEAs
HEAs are usually easier to qualify for than many traditional options that allow you to use your equity to access funds. While there are no monthly payments required, you may find yourself owing a substantial amount of your home’s future equity. If you have a good credit score and low debt, you may want to consider alternatives such as HELOCs, personal loans and cash-out refinancing.
Overall, be thorough when shopping around and comparing terms for your funding options, and consider speaking with a lawyer and a financial expert. Weighing the pros and cons of each financing option can help you determine the right choice for you, now and in the future.
Frequently Asked Questions About Home Equity Agreements
To qualify for a HEA, you must be legally recognized as the homeowner, which means you own the title or deed to the property. Also, while creditworthiness is not a major factor, HEA providers may require you to have a minimum 500 FICO credit score. However, they may be even more lenient if you have built up considerable equity (75% or higher) in your home.
The amount of equity you can access varies by HEA provider. It also depends on your home’s value and how much equity you have built up in your home. With these factors considered, HEA providers may allow you to access up to $500,000 or $600,000.
If your home depreciates in value, the amount you owe the investor typically decreases as well. Since the repayment amount is tied to the home’s appreciation, in the event of a decline, you may owe less than the original upfront amount. The terms will vary depending on provider.
While you must repay your home equity agreement, you do not need to do so through monthly payments. You need to repay your HEA funds at the sale of your home or at the end of the agreement timeline. At either milestone, you will also need to provide the promised percentage of the appreciation value of your home.
Although you remain the owner of your home under an HEA, the provider becomes a lienholder, and you could lose your house if you default or otherwise violate your HEA. For this reason, it is vital to consider the possible future payments due and any alternatives available to you when considering taking out an HEA.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
