Understanding home equity agreements: A complete guide

You’ve worked hard to fund and take care of your home. When you need to borrow money, your home can also take care of you through financing options like home equity loans and home equity lines of credit (HELOCs). Home equity agreements, on the other hand, are increasingly popular alternatives that can benefit homeowners who are looking for an alternative method for getting cash from their home.

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Home equity agreements have a lot of advantages over other financing options. Many homeowners can qualify more easily for a home equity agreement, or find that a home equity agreement fits better into their budget because there are no monthly payments. However, home equity agreements work differently than a traditional loan. Understanding these details can help you make a confident, informed decision about whether a home equity agreement is right for you.  

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 home equity lines of credit (HELOCs) that are tied to your current home equity, a home equity agreement is tied to a future percentage of your home’s equity. If your home rises in value down the road, for example, a home equity agreement will be tied to this value — not the equity you have in your home right now.

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Home prices generally rise, so it’s a way for home equity agreement companies to invest in real estate owned by you. That’s why these options are also frequently called equity sharing agreements or, in Point’s 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 home’s future value, there are a few differences in the features and structures of the deals. We’ll cover the similarities and differences in this article.

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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 home’s appreciation instead of interest.

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Instead, you’ll repay the borrowed funds — plus a percentage of your home’s equity appreciation — 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.

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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 they’ll 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.  

What are the requirements of a home equity agreement?

Home equity agreements are typically easier to obtain than traditional home equity financing options. The exact requirements vary depending on which home equity-sharing company you decide to work with, but most companies consider the same general factors:

• Equity: The amount of your home’s value that you own free and clear of any other debts such as a mortgage. It’s the inverse of your home’s loan-to-value (LTV) ratio, the percentage of your home’s value secured by debt. Typically, you’ll need at least 20% to 40% home equity to qualify for a home equity sharing agreement.
• Credit score: While not as important as with traditional home equity lenders, you’ll generally need to meet a minimum credit score of 500 or higher in order to qualify for a home equity agreement.
• Lien position: Most home equity agreement companies require a first- or second-lien position, meaning you may not be eligible if you have several types of debts already tied to your home – unless you intend to pay those debts with your incoming funds.
• Property type: You're generally eligible for a home equity sharing agreement if you own a 1-4 unit property. Rental properties are eligible, although there will be differences in the pricing. Most companies will not extend home equity sharing agreements to certain types of properties, such as manufactured homes or farms on large acreage.
• State residency: Home equity sharing companies work with homeowners in specific states. You’ll need to live within the service area of a particular company in order to qualify.
• Debt-to-income ratio (DTI): The percentage of your income that goes toward debt payments each month. While most HEA companies don’t consider DTI, some companies won’t work with you if more than 45% of your monthly income goes to already-existing debts. Point, however, does not consider your debt-to-income ratio when evaluating your eligibility for an HEI.

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Once you receive your funds, you’ll typically be required to maintain your property’s value, which includes keeping up with repairs. You’re generally free to renovate or upgrade your home at any time, with no need to ask permission. In addition, you’ll also generally need to stay up-to-date on your property taxes and purchase homeowners insurance.

The benefits of home equity agreements

Consider the pros and cons of a home equity agreement carefully before you commit to a home equity agreement. Most homeowners can take advantage of many benefits when opting for a home equity agreement:

• No monthly payments
• No money required upfront
• No restrictions on funds use
• Lower credit and income requirements
• Smaller repayment during slow real estate markets and losses
• Fewer restrictions than alternatives such as reverse mortgages

The risks and considerations of home equity agreements

Is a home equity agreement a good idea for your family? The only way to know is by considering how you’d be affected by some of the downsides. Knowing these drawbacks can also help you develop a plan to cope, such as by preparing for the lump sum payment in advance.

• Shorter term than your mortgage or an HEI (10 years)
• Requires a lien on your home
• Difficulty in leaving home to heirs – if you’re concerned about assumability, consider an HEI instead
• Smaller payout when selling your home
• May lose your home if you default on your obligation
• True cost of financing is unknown until payment is due
• Large potential financing cost if home appreciates significantly
• Some companies may not share in any equity losses if you buy out your HEA early

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.

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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 you’re working with, you may also have to pay various other costs, such as home 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.

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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 decide to 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 home’s appreciation in value as outlined in the contract.

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Many homeowners choose to repay their home equity agreement with proceeds from their home sale. If you’ll 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.

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One key difference between HEAs and HEIs is whether your repayment amount is based on a share of your home’s future total value or only on a share of the future change in value. Popular HEA products, such as Unlock’s, will share in a percentage of your home’s total future value, with the percentage varying depending on the size of your investment and the value of your home. With an HEI, you’ll share a percentage of your home’s change in value, although the initial value is risk adjusted to hedge against short-term market volatility.

Is a home equity agreement a good idea?

If you’re unable to qualify for traditional financing options because your credit score is too low or you’re not able to afford monthly payments, a home equity agreement can be a good alternative. It’s also a good choice if you want to maintain flexibility in your monthly income. If you don’t have to make regular payments, you’ll have more left over to spend or save each month.

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Homeowners looking for funding with a defined financing cost — outlined as interest payments in an amortization schedule — may be better served with a fixed-rate loan. These may also be cheaper options in the long run, especially if home values appreciate significantly. However, you will need a strong income and credit score in order to qualify since you will be making monthly payments with a loan.

How to get a home equity agreement

Getting a home equity agreement can be a simpler process than some funding alternatives, such as a cash-out mortgage refinance. Here is a good strategy you can employ:

1. Assess your finances: Make sure you’re very clear on why you need funding, how much you need, your qualifications for other financing options (such as your credit score), and your monthly budget.
2. Consider your options: Home equity agreements are a good choice for many homeowners, but they’re not right for everyone. Make sure you consider funding alternatives such as credit cards, home equity loans, and personal loans as well.
3. Gather quotes from home equity companies: Several companies offer home equity agreements, such as Unlock and Unison. These companies offer similar products to HEIs and shared equity agreements, to investigate. Make sure to consider fees, risk adjustment amounts, homeowner qualification requirements, customer reviews, and more.
4. Choose your best offer: Complete a full application with the company offering the best funding package. You may need to provide copies of your identification, as well as documents for your mortgage, income, and home. Make sure to stay in close contact during this phase in case the company needs additional information or documentation.
5. Receive funds: Once you’re approved, the home equity agreement company will disburse the funds to your bank account. If you didn’t pay any closing costs directly, you may see a smaller deposit after the company takes these fees out of your proceeds.
6. Consider repayment: You have plenty of time to create a plan for how to pay off your home equity investment amounts later. If you don’t have any plans to sell your house, you’ll need to make sure you’re prepared to pay back your funds when the time comes. Saving up money and working on building credit can help ensure you’re able to do this.

Final thoughts

Whether you’re looking to fund your next home improvement project, pay down credit card debt, or start a new business, a home equity investment or home equity agreement may be able to help. They’re especially helpful in expanding access to funding for homeowners living on a fixed income or who aren’t able to meet stricter lender requirements. In order to make sure your home equity agreement is a success, however, you should ensure you read and fully understand your contract so you can plan your options for repayment in advance.