By Gayle SatoWhat Is a Home Equity Sharing Agreement?
Quick Answer
A home equity sharing agreement is a financial arrangement that provides a homeowner with an upfront cash payment in exchange for a share of future equity. It may be easier to qualify for than a traditional loan, but it carries risks.
Americans have nearly $35 billion in home equity, but accessing it isn't always quick or easy. If you're struggling with high monthly expenses, a low credit score or limited income, qualifying for a home equity loan or line of credit can be challenging.
A home equity sharing agreement lets you tap your equity without taking out a traditional loan. In a home equity sharing agreement, you receive a lump sum in exchange for a share in your home's future value or appreciation. You don't make monthly payments, but you're required to buy out the investor's equity share in full when the agreement ends.
Here are a few things to know if you're curious about home equity sharing agreements, including how they work, where to get one and what to consider before you sign.
What Is a Home Equity Sharing Agreement?
A home equity sharing agreement—also called a home equity investment (HEI)—is a contract between a homeowner and an investment company that provides the homeowner with a lump sum in exchange for a minority stake in their property. An HEI isn't a loan. You don't have to repay it or make monthly installments. Instead, you agree to buy out the investor's share in your home at a future agreed-upon date, often 10 or 30 years later.
Example: Suppose your home is worth $750,000. A home equity investment company offers you an HEI for 10% of your home's value, or $75,000. Using an estimator from Point, a home equity investment company, we've illustrated how your repayment might look in two years, 10 years and 30 years in the table below, depending on your home's average appreciation. Of course, your actual payments will depend on your home's real appreciation.
| Average Annual Change in Value | Payoff Amount in 2 Years (Capped) | Payoff Amount in 10 Years | Payoff Amount in 30 Years |
|---|---|---|---|
| 1.5% depreciation (home loses value at an average of 1.5% per year) | $106,000 | $96,000 | $60,000 |
| No appreciation (home doesn't gain or lose value) | $106,000 | $118,000 | $118,000 |
| 1.5% appreciation (home gains value at an average of 1.5% per year) | $106,000 | $144,000 | $209,000 |
| 5.5% appreciation (home gains value at an average of 5.5% per year) | $106,000 | $232,000 | $758,000 |
For comparison, a $75,000, 10-year home equity loan at 9% has a monthly payment of $950 and interest charges totaling roughly $39,000 (for a repayment total of $114,000).
HEIs are structured such that your future buyout amount will usually be greater than the amount you borrowed, but your final payment will vary depending on how much your home's value has actually appreciated. You may be able to end your contract early if you sell your home or find another way to finance your buyout amount. However, you generally can't make partial payments and should be prepared to make your payment in full on the contract's termination date.
Tip: A home equity sharing agreement is still active if the homeowner dies or gets a divorce. Options include continuing the agreement or ending it and making the buyout payment. Some investment companies may terminate the agreement and require repayment. It's best to read the fine print of the agreement.
How Does a Home Equity Sharing Agreement Work?
Although HEIs are notoriously complex, the basic steps to getting one are relatively simple. Here are the four elements of a home equity sharing agreement.
1. Find an HEI Provider
Search online for a home equity sharing company. Major HEI providers include Point, Unlock, Splitero, Unison and Hometap. A number of smaller providers have entered the market as well. Traditional home lenders like banks, credit unions and mortgage companies typically don't offer HEIs.
2. Get a Prequalification Estimate
You'll receive an estimate showing how much you can expect to be offered and the basic terms of your agreement, based on your home's current value and your mortgage balance. The HEI provider may also check your credit and verify that your home is in an area they service.
3. Apply for and Receive Funding
During the application process, the HEI provider will arrange (or ask you to arrange) an appraisal. They may also ask you to verify your identity and provide personal and financial information as well. Although providers typically do a soft credit pull during prequalification, they may do a hard credit inquiry, which can temporarily dock your credit score by a few points, as part of the approval process.
Check your agreement carefully so you understand all of its requirements and costs. Once you sign, the provider will place a lien on your home to secure the agreement. The lien doesn't entitle them to tenancy, but your contract may include restrictions on your ability to rent your home out and a requirement to maintain it during the course of the agreement. Once you've reviewed and agreed to the terms, you're ready to receive your funds.
4. Pay Off Your Agreement
Most HEIs terminate after 10 or 30 years. On your termination date, you'll be expected to pay the full amount you owe. You may liquidate other assets, get new financing or sell your home and share the proceeds.
Types of Home Equity Sharing Agreements
Home equity sharing agreements typically use one of two models to calculate your final payment: as a share of your home's value or as a share of your home's appreciation. Here's how they differ.
Contracts Based on Your Home's Value
In this arrangement, you agree to pay a percentage of your home's value when your contract ends or you sell your home.
If you sell, the payment is usually based on the actual sale price, before deducting real estate commissions and closing costs.
If you don't sell, the investment company will use an appraisal showing your home's fair market value.
Learn more: How Much Is My House Worth?
Contracts Based on Appreciation
In this arrangement, you and the investor agree on an appraised value when you sign the agreement, as well as the percentage of future appreciation the investor will receive.
The agreed-upon value may include a "risk adjustment" that lowers the starting value to account for variations in appraisals—and to increase the potential for your home to appreciate while your agreement is in force.
Your final payment will include a share of appreciation as well as the full repayment of your original equity advance.
How Much Does a Home Equity Sharing Agreement Cost?
The cost of a home equity sharing agreement varies depending on the amount of money you receive, the share of your home's value (or future appreciation) the investor gets, and upfront fees and third-party costs associated with starting the contract.
- Use an online calculator or your prequalification estimate to gauge equity costs. Be aware, though, that your final costs will be hard to guess due to the unpredictability of future home values.
- Upfront fees typically range from 3% to 5% of the investment amount. These are costs associated with administering your agreement: origination fees, escrow fees and title insurance, for example. Upfront fees are similar to closing costs on a loan and may be deducted from your equity advance.
- Third-party expenses include appraisal costs. Your HEI company may be able to help you estimate any additional expenses associated with your agreement.
Pros and Cons of Home Equity Sharing Agreements
Home equity sharing agreements have significant pros and cons you should weigh carefully. Here are a few to get you started.
Pros
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Fewer or no income requirements: Traditional lenders verify your employment and income before approving a loan. Since HEI investors don't expect you to make monthly payments, they're less concerned about your monthly finances.
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Lower credit score requirements: For similar reasons, your credit score is also less critical when applying for an HEI. A home equity investment company will typically check your credit, but may require a lower score (500 and above) to approve your agreement.
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No monthly payments: In fact, many contracts prohibit you from making partial payments, so you don't have to prioritize the month-to-month effect on your budget.
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No direct impact on credit: An HEI isn't a loan, so it isn't reported to credit bureaus and won't affect your credit score. If you use the money to pay off credit card debt, your score may go up.
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No interest: Home equity investment companies like to point out that you aren't being charged interest, but be mindful that these agreements aren't without costs.
Cons
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Higher costs: According to estimates from the Consumer Financial Protection Bureau (CFPB), the total cost of an HEI almost always outweighs the costs of a typical home equity loan or line of credit.
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Large final payment: Because you're only making one payment, and because buyout costs can be high, final payments can be tens or even hundreds of thousands of dollars. You may not be able to afford the final payout unless you refinance or sell your home.
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Unpredictability: A final HEI payment is not only large; it's also hard to predict. HEI companies offer calculators to help you estimate your costs, in advance and as you go. Still, knowing how much your home will appreciate in 10 to 30 years is difficult, and therefore hard to plan for.
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Lien on property: The lien taken out against your property for a HEI can limit your options when you go to sell or refinance.
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Contract complexity: One of the most common complaints the CFPB reports is misunderstanding or feeling surprised by HEI contract terms. Reading your contract thoroughly, asking lots of questions and possibly consulting an attorney can help ensure you know what you're signing.
Should You Get a Home Equity Sharing Agreement?
Home equity sharing agreements aren't for everyone. Before entering into one, make sure you understand the terms of your agreement and that you've considered all of your options fully. You may decide an HEI works for you under the following circumstances.
- You really need the money. Any financial arrangement that's secured by your home is serious. Think about an HEI when you're trying to consolidate major high-interest debt, finance needed home improvements or renovations, or cover necessary medical expenses, not so much for casual spending.
- You have substantial equity. If you bought your home recently or put minimal money down, you may not have enough equity to swing an HEI.
- You don't qualify for a traditional loan. An HEI may be a viable alternative when you don't have the credit, income or employment to get a regular mortgage, home equity loan or home equity line of credit (HELOC).
- You understand your contract. You should know how your agreement is structured, how much you're likely to pay in fees, who pays for (and benefits from) renovations, when you can (and can't) sell and more. Read every detail.
- You have a plan. Your plan could be to sell before your contract ends, to refinance when you've been at your new job for a few years, to liquidate investments when the market recovers or to sock away money every month until you have enough to buy your investors out. The important thing is to have a plan. Without one, you may be forced to sell your home or face foreclosure.
Where to Get a Home Equity Sharing Agreement
Home equity investment companies such as Unison, Point, Hometap, Splitero and Unlock offer home equity sharing agreements. Banks, credit unions and other traditional mortgage lenders typically do not.
If you're considering an HEI, it's a good idea to check out multiple companies. Home equity investment companies don't operate in every state. Also, each company has its own approach to home equity sharing, with varying terms, conditions, fees, restrictions, benefits and more.
Tip: The CFPB points out that there are no standard disclosures for home equity sharing agreements. That means you, the consumer, are on the hook for asking questions and fully understanding the terms of your contract.
Alternatives to a Home Equity Sharing Agreement
Before agreeing to a home equity contract, you may want to consider these alternative funding sources, to help ensure you're making the best deal.
- Home equity loans: A traditional home equity loan lets you borrow against your home equity and pay it back in regular installments, including interest. If you qualify, a home equity may cost considerably less in interest charges and fees than a home equity sharing arrangement. Home equity loans are widely available from banks, credit unions and other mortgage lenders.
- Home equity lines of credit: A HELOC is like a home equity loan, only it gives you access to a revolving line of credit instead of a single lump sum payment. You can use your line of credit (up to the limit) as you'd like, paying interest only or low principal-and-interest payments, until the end of the draw period. At that point, you must begin repaying the loan plus interest, either in installments or in a lump-sum balloon payment.
- Cash-out refinances: Instead of taking out a second mortgage, you can refinance your primary mortgage for more than your current loan balance and use the additional cash to make home improvements or pay bills. You'll need sufficient income and good credit to qualify.
- Reverse mortgages: A reverse mortgage is similar to a home equity sharing agreement; it doesn't require monthly payments and is repaid in a single lump sum when you sell your home or move. But, instead of claiming a portion of your equity, a reverse mortgage charges interest. These are only available to homeowners age 62 and over.
Learn more: Should You Tap Into Your Home Equity?
The Bottom Line
A home equity sharing agreement gives homeowners an alternative way to tap their home equity. If you don't qualify for more traditional financing, an HEI might provide funding where other options won't.
However, HEIs can involve higher costs and a higher level of risk than traditional loans. If you're interested in this type of funding, be prepared to check out multiple companies, read and compare multiple offers, and make a concrete plan for paying off your agreement.
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About the author
Gayle Sato
Gayle Sato writes about financial services and personal financial wellness, with a special focus on how digital transformation is changing our relationship with money. As a business and health writer for more than two decades, she has covered the shift from traditional money management to a world of instant, invisible payments and on-the-fly mobile security apps.
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