The complete guide to home equity investment pros and cons

Home equity investments (HEIs) can be a game-changer for those looking to capitalize on their property's value. They provide homeowners with a way to tap their home wealth without stringent credit requirements or costly monthly payments. 

However, as with anything, an HEI has pros and cons. We'll unpack how home equity investments work, the advantages and challenges, and how to tell if an HEI is the right solution for you.

First, what is a home equity investment?

A home equity investment is a financial agreement that allows homeowners to tap into the equity in their homes in exchange for a share of their home’s future appreciation — that’s the change in value, not total home value. 

This means that when you receive a home equity investment, you do not make monthly payments. Instead, you repay your HEI in a lump-sum payment when you sell your home, refinance, or use another source of funds.

Home equity investment pros and cons

Like any other financial tool, an HEI is not the right fit for everyone. Let’s discuss the pros and cons of home equity investments to help you figure out if this financial solution is right for you.

Pros of a home equity investment

Less stringent requirements

Since an HEI is an investment in your home, your finances can be less important than the property in question. This means you may be eligible for a home equity investment even if you don’t qualify for home equity lines of credit (HELOCs) or home equity loans.

Homeowners can qualify for an HEI with less-than-perfect credit, and income is not a factor.

No monthly payments

Once you receive your HEI funds, you don’t have to worry about monthly payments. You owe nothing until your term is over — or you decide to sell your home, refinance, or repay early. This means you can maximize your monthly cash flow.

Won’t impact your mortgage

Unlike a cash-out refinance, an HEI does not replace or modify your current mortgage. You keep your existing interest rate, payment schedule, and lender relationship exactly as they are. 

In other words, your mortgage stays in place as-is, while the HEI sits alongside it.

Access to a large lump sum of cash

Depending on your home value and how much equity you have, you can get up to $600k with a home equity investment.

No restrictions on use of funds

You can use your HEI funds for anything you need — paying down high-interest debt, funding home renovations, education costs, building emergency savings, or even backing a business venture.

Your home wealth is yours to use as you see fit.

Long repayment term

Different HEI companies have different term lengths for their products – generally 10 or 30 years. A home equity investment from Point comes with a flexible, 30-year term. That means that if you choose, you’ll pay nothing for up to 30 years. 

There are no prepayment penalties, so you can repay your HEI on your own schedule.  

Homeowner protections

HEIs are designed with built-in protections that help share both upside and downside risk. If your home value increases significantly, there’s an upper limit on how much you’ll repay through a homeowner protection cap — that’s set as a maximum percentage and calculated over time. This means you’ll never owe more than the agreed cap, even if your home appreciates far beyond expectations. 

On the other hand, if your home value declines, the risk is shared—so in some cases, you may repay less than the amount you originally received.

Second properties can be eligible

Depending on the HEI company, you may be able to get an investment on a rental property or second home, albeit with stricter qualification requirements. Getting a home equity loan or HELOC on investment properties can be challenging, so this option is compelling for owners of multiple homes.

Assumable by heirs

Generally, the agreement can continue with a co-owner or be passed to the estate, rather than ending or becoming immediately due. If the homeowner passes away, it doesn’t automatically trigger repayment or speed up the timeline. 

Instead, heirs typically keep the same terms and have the same options as the original homeowner—settling the agreement through a future sale, refinance, or other funding source when the time is right.

Cons of a home equity investment

Not available for every location or property type

Home equity investments are not available nationwide. You’ll need to confirm the eligibility of your location and explore providers. 

You’ll also need an eligible type of property – certain home types, such as manufactured homes, commercial properties, or farms on large acreage, cannot qualify for an HEI.

Higher retained equity criteria 

Although home equity investments often have more flexible qualification requirements, they do require homeowners to retain a significant portion of their equity after the investment is made. 

This equity cushion is designed to help protect your stake in the home, but it can also mean you’ll qualify for a smaller investment amount or may find it harder to qualify if you don’t have enough equity in your home.

Longer application timeline

While there are some financial products you can take out quickly, such as a credit card or a personal loan, an HEI is tied to a thorough investigation of your home’s value and title. That means an HEI takes longer to fund than an unsecured product.

For some, the HEI application and closing process can take as little as three weeks to complete. However, the timeline depends on a few factors, including how quickly you complete required tasks, whether your mortgage payments are current, the timing of your home appraisal, and any debts tied to the property.

Sharing future appreciation

When you take out a home equity investment, you are agreeing to share the future appreciation in your home with an investment company. That means you will have to give up part of the proceeds when you sell your home or take out a cash-out refinance.

If you’re planning to rely on your home equity to fund a future move or retirement, that’s an important trade-off to keep in mind.

Repayment is a lump sum

With a home equity investment, there are no monthly payments along the way. Instead, the investment is typically settled in a single lump sum. 

Because repayment happens all at once and is tied to your home’s value at that time, it’s important to plan ahead and make sure it fits with your future goals and timeline. It’s a flexible structure today, but one that works best when you’ve thought through how and when you’ll want to access your home equity down the road.

Uncertain costs

Unlike a loan, you won’t know exactly what you owe until you get ready to repay. The cost is tied to the value of your home, and you cannot predict how much your home will appreciate. 

Some companies, including Point, include protections that prevent you from repaying too much if your home appreciates immensely.

Fees

Like other home equity financing options, home equity investments include standard costs such as closing costs and an appraisal fee. These are typically deducted directly from the investment amount rather than paid out of pocket at closing.

Risk of foreclosure

Like any product secured by your home, if you fail to repay your HEI, you may face the risk of foreclosure.

When is a home equity investment a good idea?

While a home equity investment is not the right fit for all homeowners looking to tap into their equity, it might be a good fit for you if:

• You can’t – or don’t want to – make a monthly payment.
• You don’t want to impact your existing mortgage or rate.
• Your income or credit disqualifies you from traditional financing solutions.
• You’re looking for a large, lump sum payment to cover a major life expense.
• You want the flexibility of paying back anytime during a 30-year term.

It’s a powerful tool in the home equity arsenal of many homeowners.