10 Home Equity Agreement (HEA) Pros and Cons

Home equity sharing allows you to tap into cash in exchange for a share of your home’s future value. Unlike a home equity loan or line of credit (HELOC), home equity sharing doesn’t require you to make monthly payments. 

Is sharing equity with an investment company the right move when you need cash? Yes for some homeowners, but no for others. We’ll help you weigh the most important home equity agreement pros and cons to decide if it makes sense for your situation. 

Pros of a home equity agreement

Let’s start with what’s good about home equity agreements. Here are some of the most attractive benefits. 

1. No monthly payments

Home equity agreements give you access to cash without requiring you to make monthly payments. Instead, you agree to make a lump sum payment to the equity-sharing company at the end of a set term, typically 10 years, or when you sell the home. 

That’s a key difference from a home equity loan or HELOC. A home equity agreement could be an attractive option if you need cash, but you don’t want to add an extra debt payment to your budget. There’s no interest due on a home equity agreement, either. 

2. Access to a lump sum

Home equity agreements put a lump sum of money in your hands, often with no upfront out-of-pocket costs. Once the agreement is signed, you walk away with cash in hand.

A home equity loan can do the same thing for you, but you’ll have to make monthly payments. HELOCs, meanwhile, are revolving credit lines you can draw against as needed. Monthly payments are also required. 

The cash you can get is tied to your home’s value and the equity-sharing company you’re working with. For example, if you have $500,000 in equity, you might be able to get a $50,000 lump sum in exchange for 10% of your home’s future value. 

3. Flexible use of funds

Home equity sharing agreements provide cash that you can use for virtually anything. For example, you might use your equity to:

• Consolidate debts
• Make home repairs or improvements
• Pay for medical expenses or nursing care
• Fund higher education for yourself, your child, or someone else
• Handle a financial emergency, such as a job loss or serious illness
• Start or grow a business
• Cover other large purchases or expenses

It’s up to you to decide what to do with the money based on your needs. 

4. No additional debt

A home equity agreement isn’t a debt like a loan or line of credit. You’re not borrowing from a lender; you’re withdrawing equity from a home you own and giving an investor (the equity-sharing company) a small ownership stake in the property. 

Home equity agreements typically won’t show up on credit reports since they’re not debts. That means they won’t count against you if you do need to take out a loan at some point.

5. Easier qualification

Home equity agreements typically have less stringent qualification requirements than traditional home equity loans or HELOCs. While equity-sharing companies can consider your credit scores, income, and debt-to-income (DTI) ratio, they’re usually more concerned with two things:

• How much equity you have now
• How much your home is likely to increase in value in the future

In short, it’s all about how much money they could make from their investment. A less-than-perfect credit score or a higher DTI is less likely to be a barrier to approval with a home equity agreement. 

Cons of a home equity agreement

Home equity agreements do have some downsides. Here’s why homeowners may want to think twice. 

1. Share of future appreciation

When a home equity agreement expires, you’re expected to repay the amount of cash you withdraw, plus a percentage of your home’s appreciation. Assuming your home’s value goes up, you could face a large balloon payment when the time comes to pay. 

If you don’t have cash on hand to cover the payment, you might be stuck with one of two options:

• Borrow what you need so you can keep your home
• Sell the home

This is one of the biggest risks to consider when dealing with home equity agreements. You need to be fairly certain that you’ll have the means to pay if you don’t want to be forced into selling the home. 

2. Potential for higher costs

If your home’s value increases significantly, a home equity agreement could be more expensive than a home equity loan or HELOC. Since the amount you repay is based on your home’s future value, it’s difficult to estimate what the true cost will eventually be.

That could lead to an unpleasant financial surprise once the equity-sharing company is ready to collect. Home equity loans and HELOCs, on the other hand, can offer some predictability if you’re locking in a fixed rate. 

With a home equity loan, for example, you can use an online loan calculator to figure out exactly what you’ll repay in principal and interest based on how much you borrow and the loan term. 

3. Limited availability

Home equity sharing is a less conventional way to tap into equity than loans or HELOCs. The pool of equity-sharing companies is smaller, and they don’t all operate in every state. 

Your ability to enter into a home equity agreement could hinge largely on where you live. If the laws in your state prohibit equity agreements, you may have to consider a home equity loan or HELOC instead. 

4. Potential impact on heirs

If you plan to leave your home to someone else, consider how a home equity agreement might affect those plans. 

For example, say you pass away before the agreement term ends. The person who inherits the home must pay the equity agreement to keep the home. If they can’t pay, they’d have to sell the home. 

Talking to an estate planning attorney or financial advisor can help you avoid that kind of situation. For example, you might buy a life insurance policy and name the person who will inherit the house as your beneficiary so they can use the proceeds to pay the equity-sharing company. 

5. Fees and closing costs

Home equity agreements can have fees and closing costs just like a home equity loan or HELOC. Some of the fees you might pay include:

• Origination fees
• Appraisal fees
• Recording fees
• Title fees
• Notary fees
• Credit check fees

The silver lining is that equity-sharing companies typically deduct these fees from the equity you withdraw, so there’s nothing to pay upfront. The downside is that it means you’ll get less cash at closing. 

An HEA would likely be one of the last resorts when it comes to pulling money out of your home, mainly due to the fact of giving up some level of control in a future decision to sell your home. Additionally, you are sacrificing some of the additional appreciation benefits of owning your home as a portion of this future growth will go to the group providing the HEA. 

Candidates for an HEA would be those with lower credit scores who can’t qualify for the best loans and/or rates and those who cannot cover the additional cash flow related to a monthly HELOC or home equity loan payment.

Rand Millwood, CFP®

Takeaways 

Home equity agreements could be a good option for homeowners who need cash but don’t qualify for traditional financing options, like a home equity loan or HELOC. However, it’s important to understand the risks, specifically the possibility of having to make a large balloon payment and potentially paying more overall than you would for a loan or line of credit.

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