Homeowners are currently in a position where they have record levels of home equity, but many are hesitant to tap into it through a cash-out refinance or a second mortgage. The high mortgage rates have made borrowing more expensive, and the idea of adding another monthly payment can feel risky when budgets are already stretched. This dilemma has led more homeowners to consider home equity agreements as an alternative option. These agreements offer cash without the burden of monthly payments, but they do come with their own set of trade-offs.
At its core, a home equity agreement (HEA) allows homeowners to receive a lump-sum cash payment in exchange for giving an investor a share of the home’s future value. Instead of paying interest and making monthly payments, the homeowner settles the agreement later, typically when they sell the home, refinance, or reach the end of the agreement’s term.
Home equity agreements are sometimes known as shared appreciation agreements or home equity investments. While the terminology may vary, the structure remains similar across most home equity agreement companies. Homeowners trade a portion of future equity for immediate access to cash. These agreements are not typically offered by traditional mortgage lenders. Instead, specialized HEA companies like Hometap, Point, Unison, and Splitero work directly with borrowers.
One key advantage of a home equity agreement is that it does not require monthly payments and generally isn’t treated as traditional debt. This flexibility can appeal to homeowners who wish to avoid stretching their monthly budget, impacting their credit score, or losing a low-rate primary mortgage. However, like all financial products, home equity agreements come with closing costs, typically ranging from 3% to 5% of the payout amount.
Supporters of home equity agreements suggest that they can be beneficial for homeowners who are equity-rich but cash-constrained. These agreements can be used for various purposes, including paying off debt, covering medical expenses, home renovations, or funding education or small business opportunities.
One of the challenges with home equity agreements is the lack of upfront cost transparency. Unlike traditional loans with interest rates and monthly payments, the cost of a home equity agreement may not be immediately apparent. Financial advisors recommend looking beyond the absence of monthly payments and evaluating how the financials will play out over time.
Home equity agreements are not regulated in the same way as traditional mortgages, with oversight varying by state and protection dependent on the contract itself. Some companies, like Hometap, aim to provide clarity and transparency by walking homeowners through different scenarios before signing and offering ongoing visibility into estimated settlement amounts.
While home equity agreements can be a viable option for some homeowners, they are not a one-size-fits-all solution. It’s essential to compare them carefully with other options like HELOCs or home equity loans and understand the implications of giving up a share of future home value. By considering the timing and appreciation of the home, homeowners can make an informed decision about whether a home equity agreement is the right choice for them.
