A home equity agreement (HEA) is an alternative way for homeowners to access cash without taking out a loan or adding monthly payments. Instead of borrowing, you receive a lump sum in exchange for a percentage of your home’s future value. This option can be useful for those needing liquidity without the burden of traditional home equity loans or reverse mortgages.
This guide explains how home equity agreements work, their advantages and risks, and who should consider them.
How a Home Equity Agreement Works
A home equity agreement involves a partnership between a homeowner and an investor (often a financial company). Here’s how it typically works:
✔ You receive a lump sum upfront, based on a portion of your home’s current value.
✔ No monthly payments are required, unlike loans or HELOCs.
✔ The investor gets a share of your home’s future appreciation (or depreciation).
✔ The agreement typically lasts 10-30 years, or until you sell or refinance.
✔ When the term ends, you repay the investor based on the home’s value at that time.
Pros of a Home Equity Agreement
1. No Monthly Payments or Interest
Since HEAs aren’t loans, you won’t have to make monthly payments or pay interest. This makes them appealing for those with fixed incomes.
2. Access to Lump-Sum Cash
Homeowners can unlock equity for home improvements, debt consolidation, or other financial needs.
3. Flexibility in Repayment
You repay the investor when you sell, refinance, or reach the agreement’s term limit—not through monthly payments.
4. Easier Approval Compared to Loans
✔ Lower credit score requirements.
✔ No strict income verification.
✔ Approval is based mainly on home value and equity.
Cons of a Home Equity Agreement
1. You Give Up a Portion of Your Home’s Appreciation
If your home value rises significantly, the investor receives a larger share of the profits when you sell or refinance.
2. Can Be Costly in the Long Run
Even though there are no interest charges, the amount you owe can be higher than a traditional loan, especially if home values increase.
3. Limited Availability
✔ Not all homes qualify.
✔ Usually available only in high-value real estate markets.
4. Repayment Can Be Unpredictable
✔ If home values decrease, repayment might be lower, but you still need to settle the agreement.
✔ Selling or refinancing could be necessary to meet repayment obligations.
Who Should Consider a Home Equity Agreement?
A HEA may be a good option for homeowners who:
✔ Need cash without monthly debt payments.
✔ Have high home equity but can’t qualify for traditional loans.
✔ Plan to sell or refinance in the future.
✔ Understand the potential trade-offs in home appreciation.
However, if you want to keep all of your home’s future value or prefer predictable costs, a home equity loan or HELOC may be a better choice.
FAQ
How is a home equity agreement different from a HELOC or home equity loan?
A HEA doesn’t involve debt or monthly payments, while a HELOC and home equity loan require repayment with interest.
What happens if I don’t sell my home by the end of the agreement?
You’ll need to repay the investor based on your home’s appraised value, often requiring refinancing or other financing.
Do I lose ownership of my home with a home equity agreement?
No, you still own your home. The investor only gets a percentage of the future value.
Is a home equity agreement a good idea?
It depends on your financial situation. If you need cash without adding debt, it can be a smart option. But if home appreciation is high, you may pay more than you would with a loan.