What is a home equity sharing agreement?

Home equity agreements (HEAs) are alternatives to reverse mortgages and home equity loans. They help homeowners cash in on the equity in their homes without needing to meet strict credit or income requirements.

While they’re easy to qualify for, HEAs can be costly and are not the best financial decision for every homeowner. Find out if an HEA is right for you or if you should stick with a traditional cash-out refinance or home equity loan.

Key insights:

• Home equity agreements (HEAs) don’t require monthly payments or perfect credit.
• You will repay the equity plus a percentage of the home’s appreciation.
• You can sell your home at any time with an HEA, but you’ll still owe money if your home’s value depreciates.

What is an HEA?

Sometimes called an equity sharing agreement or home equity investment, home equity agreements are between you and an investment company. Depending on how much equity you have in your home, you could receive a large lump-sum cash payment in exchange for a share in your home.

Michael Micheletti, head of marketing at the HEA company Unlock, broke down the math: “If your outstanding mortgage balance is $200,000 and your home’s appraised value is $500,000, you have $300,000 in equity. If the HEA provider caps equity funds at 75%, you could receive up to $225,000.”

The investment company collects a percentage of the future value of your home when you sell, end the agreement or when your term ends. (Terms are typically between 10 and 30 years). You can sell your home at any time in an HEA agreement. If you want to keep your home, your investment company might require you to wait several years before you can buy back the share of the property.

How does an HEA work?

Unlike lenders, investment companies focus strictly on how much equity you have in your property rather than how high your credit score and income are. This makes HEAs easier to qualify for as long as you have enough equity in your home.

With an HEA, you cash in on equity in exchange for a percentage of the home value in the future when you sell the home (or buy out the company).

Each HEA investment company sets its own requirements, so review them with a financial advisor before finalizing any agreement. Most HEA companies require no more than a 70% to 80% loan-to-value (LTV) ratio, and some companies do a soft credit check to ensure your score is 500 or higher.

In exchange for access to your equity in cash, the investment company gets a legal share of your home. The investment company wants to collect on this share after your home has appreciated over time, which is why agreements are usually for at least 10 years. The investment company will have a lien on your property, but it won’t be on the title or have occupancy rights.

The investment company won’t charge any monthly payments for an HEA. Instead, it will receive its money back when you sell, buy back your portion or when the agreement ends.

Investment companies hope to share a percentage of your home’s future appreciation. However, if your home happens to depreciate, you will still be responsible for paying an agreed-upon amount.

Are there risks associated with an HEA?

Home equity agreements come with risks. While they offer the chance to receive a lump sum of cash quickly, you could find yourself in trouble if you can’t repay at the end of the term. If this happens, depending on the contract you signed, you might need to sell your home or take out an additional loan to repay the investment company.

Look for a “risk adjustment” when the HEA company calculates the starting value of your home, which can increase how much you owe in the future.

In addition, you could lose equity if home prices decline. After the fees and stake are paid to the HEA company, you might end up paying more to access the money than you would have paid in interest on a new line of credit.

An HEA is not for every homeowner. “If someone needs a relatively smaller amount of cash, can manage an additional debt payment, can pay it off in a few years and can stick to a strict payment schedule, a personal loan may be an option, depending on the interest rate they can obtain,” Micheletti, from Unlock, said.

Odest Riley Jr., CEO of WLM Financial, a real estate firm in Inglewood, California, said HEAs “have the ability to be very helpful to a consumer who doesn't qualify for a standard refinance or home equity conversion mortgage. But the downside to these new products is the lack of regulation, transparency and track record, which leaves the uneducated consumer at the mercy of salespeople.”

Riley went on to say an HEA can leave homeowners with very little value to pass along to their heirs. It also can lead homeowners to cash in on their equity too early and not have it available for emergencies down the road.

How much does an HEA cost?

Home equity agreements don’t come with a monthly payment or interest charges, but they’re far from being free. Expect to pay a 3% to 5% origination fee, along with appraisal and settlement fees, which can cost another $500 to $1,500 each.

When you sell your home or the agreement ends, you’ll repay the company its share of the investment, which usually includes:

• The initial investment amount (if the home appreciates)
•  An agreed-upon percentage of the appreciation of the home value

Home equity investment company Point provides these examples, in which a homeowner with a home worth $500,000 enters an HEA, receives $50,000 and decides to sell after five years:

• The home appreciates, and the owner sells it for $593,800. Point gets $122,100 (original $50,000, plus $72,100, Point’s share in the appreciation).
• The home depreciates, and the owner sells it for $362,100. Point would take $49,100 (original $50,000 minus Point’s share in the home depreciation).

Costs vary from company to company, so it’s essential to understand the details of your agreement before you enter into an HEA.

Bottom line

Home equity agreements are easier to qualify for than other home loans, but they can come with more costs and risks. Consider a personal loan, cash-out refinance, home equity loan or home equity line of credit (HELOC) before applying for a home equity agreement.

If your credit score is preventing you from accessing your equity through refinance or a HELOC, improving your credit score first can be more beneficial to you, and it might not take as long as you think.