Explained: What Is A HEA Loan And When To Consider Getting One

Home equity is an extremely valuable asset for homeowners. It represents the market value of your home minus any outstanding mortgage debt. As your mortgage principal balance goes down and as your home appreciates in value over time, you build equity in your property.

For many homeowners, tapping into their accrued home equity can be a smart financing strategy Taking out a home equity loan or home equity line of credit (HELOC) allows you to leverage your equity to access cash for major expenses, debt consolidation, home improvements or other needs.

But what exactly is a HEA loan, and how does it work? Is it the right option for you compared to other home equity financing products? This comprehensive guide breaks down everything you need to know about home equity agreement loans.

What Is A Home Equity Agreement (HEA)?

A home equity agreement, commonly referred to as a HEA loan, is a unique way for homeowners to get cash by sharing a portion of their property’s future appreciation with an investor

Here is a quick rundown of how HEAs work:

• You apply with a HEA provider like Hometap or Unison for a lump sum cash advance based on a percentage of your accrued home equity

• If approved, the company will provide you a one-time lump sum upfront, often tens of thousands of dollars.

• Unlike a traditional home equity loan or HELOC, HEA loans do not require any monthly repayments or interest charges.

• Instead, the HEA company receives the original advance back, plus an agreed upon share of any appreciation in the home’s value when you sell the property or at the end of the contract term (usually 10-30 years).

Essentially, HEAs allow homeowners to tap into their equity without taking on new debt. Rather than borrowing money, you are selling an ownership stake in your home’s future value.

Key Characteristics Of HEAs

Now that you understand the basic mechanism of home equity agreement loans, let’s take a closer look at some of the key features that set them apart:

Upfront Lump Sum

With a HEA, you receive a single large disbursement upfront rather than taking an open line of credit. The amount you can access depends on your available equity but may often range from $25,000 to over $100,000.

No Monthly Payments

A major advantage of HEAs over other home equity financing options is that they do not require any ongoing monthly payments. You get your money upfront with no need to budget for interest or principal repayment on a regular basis.

No Interest Charges

In addition to having no monthly payments, HEA loans do not charge any interest whatsoever. You are not borrowing money, but rather sharing a stake in your home’s appreciation.

Collateral Not Required

Since HEAs do not create a lien or new loan, there is no need to put up your home as collateral. The HEA company’s right to future equity acts as the only security.

Credit Score Often Not A Factor

Many HEA providers have more flexible eligibility requirements compared to lenders. They may approve applicants with lower credit scores that wouldn’t qualify for a HELOC or home equity loan.

Repaid Upon Sale or Refinance

You do not need to repay the HEA investor until you sell the home, refinance the mortgage, or reach the end of the multi-decade contract term. For borrowers with limited liquidity, this delayed repayment is a major benefit.

Share In Appreciation

In exchange for the upfront cash, the HEA company earns a percentage (often 25-50%) of any appreciation in the home’s market value between the start and end of the agreement.

Who Should Consider A Home Equity Agreement?

Now that you understand the basics of how HEAs work, you may be wondering if this product is right for your situation.

Generally, HEAs appeal to homeowners that fit one or more of the following criteria:

• Need Lump Sum: You need tens of thousands in cash now for a major expense but cannot afford monthly loan payments.

• Limited Options: Due to credit score or debt-to-income ratio, you may not qualify for other home equity lending products.

• Urgent Liquidity: You require emergency funds quickly for an unexpected life event but have minimal savings.

• Temporarily Low Income: Your income is temporarily reduced but you expect it to rebound in the future.

• Confident In Appreciation: You anticipate strong, steady home price appreciation in your local real estate market over the long run.

• Long-Term Outlook: You plan to remain in your home for at least 10-15 more years before selling or moving.

While worth considering for some borrowers, HEAs also have some definite drawbacks to weigh (see cons section below). They should not be entered into lightly without understanding the risks.

Pros And Cons Of Home Equity Agreement Loans

Now that you understand the basics of HEAs and what types of borrowers may find them beneficial, let’s take a more detailed look at the notable advantages and potential disadvantages.

Pros Of HEAs

• Upfront Lump Sum: Receive tens of thousands all at once rather than via an open line of credit.

• No Monthly Payments: Avoid the burden of regular interest and principal repayment.

• No Interest Charges: Pay nothing in interest since you are sharing equity rather than borrowing funds.

• Easier To Qualify: Can get approved with lower credit scores than most HELOCs or home equity loans require.

• Delayed Repayment: Only repay decades later upon home sale, not on rigid monthly schedule.

Cons Of HEAs

• Repayment Uncertainty: Impossible to know exactly how much you’ll owe later due to unknown home appreciation.

• Equity Share: Must surrender significant portion of future equity gains to investor.

• Strict Terms: Locked into lengthy contract with pre-set appreciation sharing percentage.

• Future Payment Shock: Repayment due in full as lump sum decades later.

• Less Accessible: Maximum advance limited to only 10-15% of home value typically.

• Closing Costs: Pay thousands in appraisal, origination, title and recording fees.

How Does A Home Equity Agreement Work Step-By-Step?

Now that you have a solid foundational understanding of HEAs, let’s walk through the step-by-step process of actually getting one:

1. Research providers: Compare different HEA companies like Unison, Hometap, Point and Unlock. Consider factors like fees, appreciation percentage, eligibility criteria and more.

2. Estimate advance: Use online tools or speak to a representative to get a rough estimate of the size lump sum you may qualify for based on your available home equity.

3. Submit application: Complete required documents including financial information, identification, and details on income and assets.

4. Get home appraised: HEA issuer will arrange for a third-party appraisal to definitively determine your home’s current fair market value.

5. Get approved: The HEA company will review your application and issue a formal approval letter detailing the exact terms if you qualify.

6. Sign contract: Carefully review the agreement terms before signing the legally binding HEA contract.

7. Pay fees: At closing, you’ll pay for the appraisal, origination fee, title insurance and other applicable costs.

8. Receive lump sum: Once contract is signed and fees paid, the HEA company will wire your upfront advance to your designated account.

9. Notify upon sale: When you eventually sell the home or refinance, inform the HEA issuer so they can receive their share of appreciation repayment per the contract.

What Are The Repayment Terms Of HEAs?

As discussed above, one of the most unique aspects of HEAs is that you make no payments over the course of the agreement term and repayment is due only once you sell the home. But what exactly do those repayment terms entail?

When the agreement ends and the home is sold, three basic scenarios can unfold:

Home Value Increased: You repay original advance + agreed upon percentage (often 25-50%) of the home appreciation.

Home Value Stayed Flat: You repay original advance amount. The HEA issuer earns nothing beyond principal.

Home Value Decreased: You repay original advance less a deduction for the percentage drop in value.

In the best case, you just repay the original principal if no appreciation occurred. In the worst case if home prices dropped, your repayment is reduced somewhat. But if strong appreciation occurred as hoped, your repayment balloons significantly.

This unpredictable future repayment is the double-edged sword of HEAs. While the delayed repayment schedule helps borrowers lacking current liquidity, the future obligation creates uncertainty and risk.

What Are The Main Alternatives To HEAs For Tapping Home Equity?

While HEAs offer unique benefits for some homeowners, they are certainly not the only option for leveraging your equity. Below