Home equity agreements (HEAs) also known as shared appreciation mortgages are becoming an increasingly popular way for homeowners to access the equity in their homes. But are these complex financial products right for you? Here, we’ll explore the pros and cons of HEAs to help you decide if tapping into your home through an HEA is a good idea.
What is a Home Equity Agreement?
A home equity agreement allows you to receive a lump sum payment in exchange for a share of your home’s future appreciation when you eventually sell.
Here’s how it works
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You receive an upfront payment based on a percentage of your home’s value, usually 10-20%. This money is yours to spend as you wish.
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When you sell the home or pay off the mortgage, you repay the initial amount plus a percentage (typically 50%) of however much your home appreciated during that time.
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There are no monthly repayments. The HEA provider makes money through their share of the home’s growth in value.
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You can end the agreement early by refinancing or paying back the upfront cash plus accrued interest and/or fees.
HEAs are generally easier to qualify for than home equity loans since repayment is tied to home value rather than your income. They also don’t require monthly payments. However, they can get expensive if your home appreciates substantially.
Pros of Home Equity Agreements
Access equity without monthly payments. HEAs provide lump sum financing with no ongoing repayment obligation. This can be helpful for one-time costs.
Qualify with poor credit. HEAs depend on your equity rather than credit score. If you have sufficient equity but poor credit, an HEA may still be an option.
Pay only upon selling. Repayment isn’t due until you sell or refinance, so there’s no monthly burden. This gives you financial flexibility.
Tap equity without taking on debt. With an HEA, you don’t borrow money. Instead, you sell a percentage stake in your future home appreciation. This may appeal if you want to avoid further debt.
Potentially pay less overall. If your home doesn’t appreciate much, you could pay back less than with a loan charging accumulated interest. But note there are risks if appreciation is high.
Cons of Home Equity Agreements
Risk of owing significant sums. If your home appreciates greatly, you could owe the HEA provider far more than you received upfront. There’s no cap on how much you might eventually owe.
Complex terms. HEAs have complicated terms. Make sure you fully understand the contract before signing, as specifics like the appreciation percentage can severely impact costs.
Fees and closing costs. As with traditional loans, you’ll pay origination fees, appraisal fees and closing costs with an HEA. These can range from 2-5% of the amount received.
Prepayment penalties. Ending the agreement early often incurs prepayment penalties and accrued interest charges, especially in the first few years. Read the fine print.
Tax complications. HEAs can create tax headaches if not structured properly. Consult a tax pro to understand the implications.
May need to move sooner. By tying your repayment to home sale, an HEA incentivizes you to move sooner to limit appreciation gains from which the provider shares.
Key Considerations for Home Equity Agreements
HEAs involve substantial risk and complexity. Carefully weigh these key factors when deciding if one makes sense:
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Future plans. Consider if you plan to stay in the home long term or move within a few years. HEAs reward the provider more on higher appreciation.
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Home value trends. Research price trends in your area. Steady, moderate appreciation minimizes HEA costs, while hot markets increase risks.
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Uses for funds. Ensure the lump sum will be used wisely. Improving the home could potentially increase value, while frivolous spending gives all gains to the provider.
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Provider reputation. Thoroughly vet prospective HEA companies for complaints, litigation or shady practices. This complex product demands trust in the provider.
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Fine print. Understand every term, especially the appreciation percentage, fees, prepayment penalties and exit provisions if life circumstances change.
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Tax impact. Consult a tax professional to structure the HEA to minimize tax burdens. Failing to do this properly can result in unanticipated costs.
Alternatives to Tap Home Equity
If an HEA seems too risky or complicated, alternatives like home equity loans or lines of credit may better suit your needs with more predictable costs and terms:
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Home equity loan: This provides a lump sum upfront that you repay over a fixed term with fixed interest. Good for one-time expenses.
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HELOC: A revolving credit line to access as needed. Offers flexibility but variable rates carry risk. Good for ongoing needs.
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Cash-out refinance: Lets you tap equity via a new, larger mortgage. Consolidates debts but repayment is over 30 years.
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Reverse mortgage (age 62+): Converts equity to income but reduces what heirs inherit. Requires credit approval.
The Bottom Line
HEAs provide easy access to your equity without monthly payments or credit checks. However, appreciation-sharing means you risk owing the provider exponentially more than you received if home values significantly rise. For many homeowners, lower-risk products like HELOCs, home equity loans or cash-out refinances may be smarter options to leverage home equity. But for some unique situations, an HEA could be worth considering after thoroughly researching providers, contract terms and tax implications. Consult professionals to ensure you fully understand this complex product before moving forward.
What is a home equity agreement?
A home equity agreement (HEA) is a financing option that allows you to borrow money against your future home equity. Unlike home equity loans and HELOCs that are tied to your current home equity, a home equity agreement is tied to a future percentage of your homeâs equity. If your home rises in value down the road, for example, a home equity agreement will be tied to this value â not the equity you have in your home right now.
Home prices generally rise, so itâs a way for home equity agreement companies to invest in real estate owned by you. Thatâs why these options are also frequently called equity sharing agreements or, in Pointâs case, a Home Equity Investment (HEI). Although the home equity agreement and the HEI are similar products, both built on providing home owners funds from their home equity in exchange for a portion of the homeâs future value, there are a few differences in the features and structures of the deals. Weâll cover the similarities and differences in this article.
Traditional home equity debts like home equity loans and HELOCs also require monthly payments and charge interest. A home equity agreement, in contrast, does not require any monthly payments and charges a percentage of your homeâs appreciation instead of interest.
Instead, youâll repay the borrowed funds â plus a percentage of your homeâs equity appreciation â in one lump sum at the end of the contract period, generally 10 years. If 10 years is not a sufficient term-length for your needs, an HEI, which comes with a 30 year term, may be a better option. You may need to repay your home equity agreement earlier if you sell or refinance your home.
Home equity agreement companies may also allow you to repay your HEA at any time without penalty if you want to regain access to all of your future equity. However, some companies place limits on whether theyâll share in any equity losses with you if you end your contract early, such as if you decide to buy out your contract during a market downturn. Point, however, will share in any losses, even if you buy out your contract early. Â
How much does a home equity agreement cost?
The exact cost structure for home equity agreements varies, although you can expect to pay similar types of fees with most home equity agreement companies. Your costs will generally be split into two different time periods: when you apply for the home equity agreement and when it comes time to repay your funds.
Most home equity agreement companies charge a transaction or origination fee, typically between 3.9% and 4.9% of your funding amount. Depending on the company youâre working with, you may also have to pay various other costs, such as appraisal fees, title search fees, escrow charges, or recording fees. You can often deduct these costs from the money being disbursed to you so that there are no out-of-pocket charges to access funds, although the amount of money appearing in your bank account may be smaller to accommodate these costs.
You can then enjoy a long period free from fees and payments until it comes time to pay back your home equity agreement, typically at the end of a 10 to 30-year term length or when you sell your home. Home equity sharing agreements are repaid at this time with one large balloon payment consisting of the original amount borrowed, plus a share of your homeâs appreciation in value as outlined in the contract.
Many homeowners choose to repay their home equity agreement with proceeds from their home sale. If youâll be keeping your home, you may be able to refinance your home equity sharing agreement for another term length, obtain alternative financing such as a personal loan or a cash-out refinance, or use cash savings to repay your home equity agreement.
One key difference between HEAs and HEIs is whether your repayment amount is based on a share of your homeâs future total value or only on a share of the future change in value. Popular HEA products, such as Unlockâs, will share in a percentage of your homeâs total future value, with the percentage varying depending on the size of your investment and the value of your home. With an HEI, youâll share a percentage of your homeâs change in value, although the initial value is risk adjusted to hedge against short-term market volatility.
HELOC Vs Home Equity Loan: Which is Better?
FAQ
What are the cons of a HEA loan?
How does an HEA loan work?
What is the downside of an HEA?
Is an HEA better than a HELOC?
Is a home equity loan a good idea?
A home equity loan may be a good idea for homeowners who need a large amount of money for a specific purpose, such as home renovations or paying off high-interest debt, but it’s essential to weigh the pros and cons before committing to this type of financing. Lower interest rates.
What happens if I don’t repay my HEA loan?
You always retain full ownership of your home when you borrow with an HEA. However, just as a mortgage lender isn’t listed on your home’s title but does have a lien filed on your home, so too will your HEA partner. If you’re not able to repay the agreement as planned when payment becomes due, your home may be put into foreclosure .
What are the benefits of a home equity loan (HEA)?
Another major benefit of HEAs is that they’re often easier to qualify for than regular home equity debt products, especially in terms of your credit score and income. Loans and lines of credit require regular payments, and so typically require a high credit score and income.
Should I take out a HELOC or a home equity loan?
Whether you should take out a HELOC or a home equity loan depends on your specific needs. Here’s a look at the pros and cons of each. Home equity loans can be a great way to improve your home, consolidate debt, pay for student loans or help alleviate other financial strains on your budget.