Tapping your equity: Understanding shared equity agreements

Everyone should have the freedom and financial flexibility to afford what they want and need —such as enjoying a stress-free retirement or helping with their grandchild's wedding. However, paying for those things in cash often seems difficult or impossible — especially if you can’t qualify for traditional loans.

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The good news is, as a homeowner, you can leverage equity to meet your needs. While many equity products create monthly payments or add to the debt load, others help homeowners break the debt cycle — like a home equity sharing agreement. An alternative to traditional home financing, they offer many advantages, such as easier qualification requirements and a more flexible payment structure. In this post, we'll explore what home equity-sharing agreements are, how they work, and the potential benefits they offer.

What is a home equity sharing agreement?

A shared equity financing agreement is an alternative way for homeowners to obtain funds for large purchases. Some companies also offer home equity sharing agreements to help provide funds for a house down payment, which can help people afford a home in high-cost-of-living areas where they might otherwise be priced out.

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Instead of paying interest like with a regular loan, home equity sharing agreements are repaid a bit differently. You’ll need to repay back the initial amount you borrowed, plus a percentage of your home’s appreciated value, at the end of a specified term length. This is why it works more like a partnership than a loan — you may have to pay a lot or a little, depending on which way home values go over the years.

How does a home equity sharing agreement work?

A home equity sharing agreement works similarly to a traditional mortgage or a home equity loan, with a few key differences. Both options require you to offer up a slice of your home equity in exchange for a lump sum of money, but the way you qualify for your funds differs greatly.

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If you opt for traditional home equity financing, you’ll need good credit and income to qualify. If you’re approved, you’ll generally need to make regular payments right from the start. After you’ve paid off the loan, you’ll own all of the equity in your home again. If you sell the property, you’ll get all of the proceeds.

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A shared equity agreement, on the other hand, doesn’t require any ongoing payments and is much easier for most people to qualify for. You’ll typically repay a home equity sharing agreement after 10–30 years with a single lump sum payment, or earlier if you choose. Many people choose to repay the shared equity agreement out of the proceeds from selling their home, or with a cash-out refinance loan or other traditional financing option.

The pros and cons of home equity sharing agreements

More and more people are choosing home equity sharing agreements because they have an edge over traditional financing options in many cases. However, it's always important to weigh the pros and cons to understand if it fits your needs well. 

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Pros of home equity sharing agreements: 

• Longer and more flexible repayment terms
• Easier qualifications
• No monthly payments
• No early payment penalties — buy back your equity at any time
• Can be assumed by heirs
• Homeowners share in gains or losses with partner company

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Cons of home equity sharing agreements:

• Not available for every location or property type
• Full buyback cost is unknown until repayment
• Like any equity financing product, you risk foreclosure if you default

Types of shared equity finance agreements

Most home equity sharing agreements fall into two camps: shared equity mortgages designed to help more people buy a home, and home equity investments that provide a flexible source of funds for current homeowners.

Shared equity mortgages

A shared equity mortgage helps would-be homeowners afford the hefty down payment needed to get approved for a mortgage. In exchange for providing funds, the partner company often owns a portion of the home, similar to how married couples may both be listed as owners of a home.

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Shared equity mortgages are more commonly offered through local governments and nonprofit organizations to help promote homeownership among people who otherwise might not be able to afford a house.

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The money that you borrow is generally repaid at a later date in one lump sum when you sell or refinance your home, plus a portion of your home’s appreciation.

Home equity investment (HEI)

A home equity investment differs in that the partner company doesn’t usually become a part owner of the home like with a shared equity mortgage. Instead, the partner company is usually listed as a lienholder, similar to how your mortgage lender may be listed as a lienholder for your home.

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Home equity investments are repaid similarly to shared equity mortgages: as a lump sum, plus a portion of your home’s appreciation. For example, let’s say that you borrowed $100,000 in exchange for 25% of your home’s future appreciation in 30 years. If your home’s value rose by $50,000, you’d then owe a total of $112,500 — the initial $100,000, plus 25% of the $50,000 appreciation ($12,500).

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In other cases, a company might provide funds in exchange for a smaller slice of your home’s entire value later on. For example, if a company offered you $100,000 in exchange for a smaller 5% cut of your whole home’s value later on, you would instead owe $125,000 if you sold it for $500,000. That’s the initial amount you borrowed ($100,000), plus 5% of your home’s $500,000 sales price ($25,000).

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If you can’t obtain financing through a home equity loan or HELOC, an HEI may be a competitive alternative to explore. Several home equity sharing companies are willing to work with homeowners with credit scores as low as 500. Additionally, there are generally no income or debt-to-income requirements.

What can you use home equity sharing agreement funds for?

If you’ll be using a shared equity mortgage, you can use the funds to help you make a down payment. This is especially useful in high-cost-of-living areas, where it can be tough for anyone to save up the 20% down payment needed to avoid paying extra for private mortgage insurance (PMI).

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Home equity investments, on the other hand, are a much more flexible source of funds. You can use them for just about anything you want, similar to the way people sometimes use personal loans. Homeowners commonly use HEIs to pay for things like:

• Medical expenses
• Paying off high-interest debt
• Supplementing retirement funds
• Supporting family, such as paying for higher education
• Home upgrades and repairs, especially for aging in place

FAQs

Who can benefit from a home equity sharing agreement?

A shared equity mortgage can benefit prospective buyers with little savings or no assets to leverage. By partnering with a company for the down payment, buyers can secure a property they might otherwise not afford, qualify for better terms, and avoid needing private mortgage insurance (PMI).

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A home equity investment can be a good solution for homeowners with equity in their homes, including those with limited incomes, those who prefer not to take on more debt, individuals with credit challenges, or seniors looking to access home equity without the pressure of monthly payments. 

Are there any risks associated with home equity sharing agreements?

As with any traditional mortgage or equity financing product, if you default on the terms of the agreement, you risk penalties, fees, or, in more severe cases, repossession of the property. 

How much does a home equity agreement cost?

The cost varies depending on the provider and the specifics of the agreement. Typically, upfront fees include appraisal fees, origination fees, and administrative costs. These fees are usually deducted from the homeowner's cash. 

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Additionally, the homeowner may be responsible for other closing costs, such as legal fees or title insurance. 

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Is a home equity share agreement right for me?

It’s important to consider all of your options if you need to borrow money — traditional and alternative financing included. Traditional financing options may be a good choice if you have excellent credit and a high income to make regular payments. Not everyone has that, though, and that’s where home equity sharing agreements can come in.

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Consider looking into an HEI with a company like Point if you have a lot of equity in your home but you aren’t in a position to qualify for traditional financing. Partnering with Point can also be a good option if you prefer to defer payment until a later date, while you enjoy living in your home today.