Is a home equity agreement a good idea? Exploring pros and cons

Homeowners today have more ways than ever to tap into their home equity — whether to remodel, pay off high-interest debt, or reach other financial goals. While many home equity financing products, like home equity loans and home equity lines of credit (HELOCs), require monthly payments and can be difficult to qualify for, that’s not always the case.

Home equity agreements (HEAs), also called home equity sharing agreements, are a newer option that are typically easier to qualify for and require no monthly payments until they’re repaid in full.

If you’re considering an HEA, here are the key pros and cons to help you decide if it’s the right choice for you and your family.

How home equity agreements work

A home equity agreement is different from traditional debt; rather, it’s a partnership where you offer a share of your home’s future value in exchange for access to money today.

There are no monthly payments — instead, the agreement is settled at the end of the HEA term, typically 10 years, unless you sell the home or otherwise pay back early.

When the term ends, you’ll repay the amount you originally borrowed, the agreed-upon percentage of your home’s new value, and any fees. ‍

Home equity agreement pros and cons

There are many benefits to HEAs, but also many potential downsides. If you know these drawbacks, you can prepare for them in advance so you can ensure the best experience possible.

Pros of home equity agreements

No monthly payments

Making regular monthly payments, as you do with home equity loans and lines of credit, can be a significant drag on your cash flow. That’s especially true if you’re already on a fixed income, and it can make it even tougher to make ends meet.

Home equity agreements, however, don’t require any payments. That frees up more of your monthly income to go toward savings, living expenses, or even just enjoying yourself.

Lower credit and income requirements

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.

You can be approved for an HEA with a credit score as low as 500 in some cases; far below what most home equity loans or HELOCs require. ‍

Many HEA providers also have no income requirements. This makes it a great product for self-employed borrowers or homeowners with low incomes.

No upfront cash required

Like other financing options, HEAs typically come with a few extra charges such as origination fees and closing costs. These fees help clear legal hurdles and set up contracts so that everyone is protected.

While you can pay for these costs out of pocket if you wish, it’s not a requirement. Instead, many HEAs allow you to subtract these costs from the funds that you’ll be disbursed so that your payout is a bit smaller. This makes HEAs more accessible to people who don’t have a lot saved up right now.

Partial buyout

Most HEA providers allow you to buy out of your contract early to regain control over your full home equity amount whenever you want. This can be a substantial cost, but some home equity sharing companies offer partial buyouts. Making smaller partial buyouts can be an easier route toward paying back your contract in full. Not every company offers this option, so make sure to do your research if this feature is a priority for you.

Cons of home equity agreements

True cost is unknown until later

With debt-based financing, like credit cards, you know the exact cost of borrowing money before you even take out the loan. This is measured by a loan’s annual percentage rate (APR), and it offers a handy way to compare different financing options and calculate the exact dollar amount in fees and interest that you’ll pay over the entire course of the loan.

That’s not how HEAs work, however. The amount you’ll have to repay is based on the future value of your home via a home appraisal. Since that’s not possible to know in advance, there’s no way to compare how expensive it will be next to your other borrowing options.

The good news, however, is that many shared equity agreement companies place a limit on the maximum equivalent interest rate you’ll have to pay. This can be a good way to compare your borrowing options since your repayment amount won’t be any higher than this.

Short repayment term

Many HEA companies offer only a 10-year term, which means that you’ll have a shorter runway to pay back your HEA. If you’ll be saving up money to repay using cash or building a good credit score to qualify for a loan, you may need a longer period to get ready.

A 30-year term can simplify repayment since you will almost certainly be done paying off your mortgage in 30 years. If the longer term is important to you, you may want to consider a home equity investment (HEI) vs. an HEA. An HEI gives you the security of a 30-year term with the flexibility to repay at any time.

Single payment

Unlike most other types of financing that people are familiar with, HEAs require repayment in the form of a balloon payment; i.e., everything, including fees, your share percentage, and the original amount of money you borrowed, all at once. This one-time payment will be tens of thousands of dollars or even higher, depending on how much cash you pull out, which isn’t exactly something most people can pay at the drop of a hat.

Instead, many homeowners choose to repay an HEA out of the sale proceeds then they decide to sell their home. (Keep in mind this means that you won’t receive the full amount of your home sale). Others may choose to use savings or take out another loan, such as a reverse mortgage.

Foreclosure possibility

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.

Impact on heirs

It’s a good idea to consider how an HEA might fit into your estate plan, especially if other people live in your home with you or you’re looking to pass on your home to an heir. Most HEAs become due once the borrower (or borrowers, if more than one person is listed on the agreement) passes away.

If other people are living in your home but didn’t sign the agreement with you, they (or your estate) will have to pay back your HEA in order to keep the home. Otherwise, it’ll have to be sold, even if your surviving spouse still lives in the home.

This is one of the major differences between HEI and HEA products. With an HEI, your heirs can choose to take over your contract if they wish, thereby allowing them to keep the home within your family more easily.

Limits to risk sharing

Sometimes having your repayment amount tied to your home’s value, rather than a pre-set interest rate, works in your favor. If your home’s value goes down due to market conditions and other factors outside of your control, the amount of money you may have to repay could be less than the original amount of money you borrowed.

However, some HEA companies put limits on this. For example, if you buy out your HEA contract early (to take advantage of a downswing in home prices, let’s say), some providers won’t share those losses with you. In this case, there may be an alternative way to calculate the HEA repayment amount in the contract so that the company doesn’t take a loss. An HEI does not penalize you for early repayment and will share the loss with you under a predetermined threshold.

Additional considerations

Like most other home equity products, an HEA will require you to care for your home and maintain homeowners insurance coverage. Failing to do so can put you at risk of default. Additionally, some HEA providers will have special requirements for renting out your home, refinancing your mortgage, or otherwise making changes to the property. It’s important to be aware of all of your contractual duties before you sign.

Frequently asked questions

What happens if my home’s value drops or rises—how does that affect repayment?

Since repayment is tied to the value of your home, if your property value rises, you'll owe more because the company shares in that appreciation. Alternatively, if your home value drops, you’ll owe less since the company also shares in the loss.

Are there advantages like no monthly payments or easier approval with bad credit?

Yes. Many home equity agreements offer advantages, like no monthly payments and easier approval, compared to traditional loans. Because they’re based on your home’s equity rather than your finances, they can be a good option if you have less-than-perfect credit or fluctuating income. This flexibility can make it easy to tap into your home wealth without adding another monthly bill.

What happens at the end of the term if I can’t repay or refinance?

If you can’t repay or refinance your home equity agreement at the end of the term, you may need to sell your home to satisfy the agreement. In some cases, the company may offer extensions or alternative repayment options, but these depend on your specific contract and situation.

This is why a longer term — like 30 years with some HEIs — can be so valuable compared to a 10-year term. A longer term gives you far more time to plan, build equity, and choose the best moment to repay, rather than being forced into a decision by a shorter timeline. Always review your agreement early and explore options well before the term ends.

Who typically benefits most—or least—from a home equity agreement?

Home equity agreements can be a great fit for homeowners who have built up a lot of equity but might not qualify for a traditional loan because of credit issues, inconsistent income, or simply wanting to skip monthly payments. They work well for people who plan to stay in their home for a while and like the idea of choosing when to repay. However, if you expect your home’s value to rise quickly, an HEA might not be the best choice since you’ll share that increase when it’s time to settle up.

Is a home equity agreement a good idea?

Home equity agreements can be an excellent option if you need to take money out of your home, particularly if you’re having a hard time qualifying for other financing methods due to income and credit challenges.

However, it’s essential to consider the long-term implications. Understanding HEA loan pros and cons can help determine if a home equity agreement aligns with your financial goals and timeline.

If you're looking for a longer term length or more flexibility in terms of your contract, an HEI from Point may be a better option. Homeowners today have a wealth of options when it comes to unlocking their hard-earned equity. Make sure you do your research and choose the best option for your finances and long-term goals.